Opinion
G057864
05-27-2020
GARTH BLUMENTHAL, Plaintiff and Respondent, v. FLETCHER JONES, JR., et al., Defendants and Appellants.
Arent Fox, Aaron H. Jacoby, Karen Van Essen, Douglas E. Hewlett, Jr.; Fisher & Phillips, Karl R. Lindegren, Lizbeth Ochoa and Ryan D. Wheeler for Defendants and Appellants. Greenberg Gross, Alan A. Greenberg, Wayne R. Gross, Joshua M. Robbins and Adam M. Sechooler for Plaintiff and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2018-01003027) OPINION Appeal from an order of the Superior Court of Orange County, Robert J. Moss, Judge. Order affirmed. Motion for sanctions granted. Arent Fox, Aaron H. Jacoby, Karen Van Essen, Douglas E. Hewlett, Jr.; Fisher & Phillips, Karl R. Lindegren, Lizbeth Ochoa and Ryan D. Wheeler for Defendants and Appellants. Greenberg Gross, Alan A. Greenberg, Wayne R. Gross, Joshua M. Robbins and Adam M. Sechooler for Plaintiff and Respondent.
* * *
Defendants Fletcher Jones, Jr. and Fletcher Jones Motorcars, Inc. (Motorcars) appeal from the trial court's order denying their motion to compel arbitration. Fletcher Jones contends the court erred in finding it waived arbitration, including because Jones "acted in bad faith" in "delaying invocation" of an arbitration agreement. Jones did not invoke the arbitration provision until nine months into the litigation—after using the judicial forum for its own purposes (multiple demurrers and a motion to strike) while stalling plaintiff Garth Blumenthal's discovery efforts. After Jones's second demurrer was overruled, Jones sought arbitration the day after Blumenthal filed a motion to compel Jones's discovery responses. The trial court found this conduct constituted "bad faith" as "part of a deliberate strategy . . . to use the litigation process to their advantage if possible, and pursue arbitration only if that failed."
We will generally refer to appellants collectively as "Fletcher Jones" or "Jones" because their arguments do not distinguish between the individual and the corporation bearing that name.
Regrettably, this conduct is not new for Fletcher Jones or its counsel, Arent Fox. Some years ago, this appellate court found similar conduct by Jones supported a waiver finding. (Lewis v. Fletcher Jones Motor Cars, Inc. (2012) 205 Cal.App.4th 436, 449 (Fletcher Jones).) Before that, this court warned Arent Fox, in a case involving similar use of the litigation forum followed by "its late-asserted right to arbitrate," that such conduct "would have supported" a bad faith finding. (Adolph v. Coastal Auto Sales, Inc. (2010) 184 Cal.App.4th 1443, 1452 (Adolph).) As we explain, the record supports the trial court's waiver finding; we therefore affirm the court's order.
We also conclude appellate sanctions are warranted because the primary reason that Fletcher Jones and counsel advance to attack the trial court's waiver and bad faith findings is not credible. Fletcher Jones and counsel attempt to draw distinctions between Blumenthal's original and second amended complaints (SAC) to justify Jones's delay in seeking to compel arbitration, based on an alleged change in the nature of the SAC. But examining Jones's purported distinctions reveals they are illusory. Blumenthal's essential claims did not change from his initial complaint through the SAC. Because Jones's rationale for its delayed invocation of arbitration, and for appealing the trial court's waiver finding, is so wholly without merit as to be objectively frivolous, we impose sanctions on Fletcher Jones and counsel, jointly and severally, as discussed more fully below.
FACTUAL AND PROCECURAL BACKGROUND
We set out the material allegations of the complaint and the SAC to illustrate the difference between the two—or the lack thereof. We then describe in some detail the case's procedural history to put the pleadings and Fletcher Jones's motion to compel arbitration in their proper context.
1. Causes of Action
Blumenthal's initial complaint alleged seven causes of action against Jones: Breach of Contract/Third Party Beneficiary; Breach of Contract; Promissory Fraud; Rescission of Agreement of Satisfaction; Declaratory Relief; Promissory Estoppel; and Breach of Fiduciary Duty. The SAC alleged the same causes of action, but changed the headings for them, deleting one and expanding the "Breach of Contract" cause of action into two headings, one for "Breach of Written Contract" and the other for "Breach of Oral Contract." Despite the additional contract cause of action, the SAC still asserted seven causes of action because it deleted the heading for the "Declaratory Relief" cause of action alleged in the complaint, and instead requested that relief within the rescission cause of action.
The complaint's third party beneficiary cause of action alleged that "[i]n early 2006, Jones and Motorcars entered into a valid, binding, and enforceable agreement with Mercedes-Benz that required Jones and Motorcars to offer Blumenthal employment as General Manager at Motorcars until five years after the opening of [a new] Mercedes-Benz of Temecula dealership." (Italics added.) Blumenthal alleged the agreement to continue to employ him as general manager was formed in a binding letter of intent (LOI) between Mercedes-Benz, on one hand, and Jones and Motorcars, on the other, to open the new dealership.
Fletcher Jones premised its eventual motion to compel arbitration on an arbitration provision in an "Employee Acknowledgment and Agreement" that Blumenthal signed in 2009. The arbitration provision extended to "any claim, dispute, and/or controversy . . . having any relationship or connection whatsoever with my . . . employment by . . . or other association with the Dealership . . . ."
The introductory paragraphs in both the complaint and the SAC explained that Motorcars was a "struggling dealership" that Jones purchased out of bankruptcy in 1991. Both pleadings asserted that, with Blumenthal's assistance "for 25 years [as] the driving force behind the stunning success of Motorcars," including as general manager beginning in 1994, Jones transformed the once-bankrupt entity into Fletcher Jones Motorcars of Newport Beach, "'the largest Mercedes-Benz dealership in the world . . . .'" Using Motorcars as a foundation, according to the complaint and the SAC, "Jones expanded his automotive empire into other regions and other makes of cars," including "close to 20 dealerships, which annually generate billions of dollars in revenue."
The complaint and the SAC both referred to Jones and Blumenthal as partners, alleging generally that Blumenthal sought redress for "mistreatment he has suffered at the hands of his partner, Jones." Blumenthal alleged that in the decade before Jones purchased Motorcars out of bankruptcy, Blumenthal had "developed a reputation for turning around struggling dealerships," and "[t]he regional Mercedes-Benz manager recommended to Jones that Blumenthal lead the new Newport Beach Mercedes-Benz dealership." Blumenthal's complaint and the SAC alleged that after Jones "brought in [Blumenthal] as his partner to manage the dealership, with spectacular results," Jones betrayed him.
The first cause of action in the SAC did not differ materially from its counterpart in the initial complaint. The SAC again alleged the same third party beneficiary breach of contract claim arising from the LOI. The SAC changed the wording of the cause of action slightly. Instead of an underlying contract with Mercedes-Benz that required Jones and Motorcars "to offer Blumenthal employment as General Manager at Motorcars" for five years after the opening of a new Temecula dealership (complaint), the SAC stated the underlying agreement required Jones and Motorcars "to provide Blumenthal with the 'opportunity' to remain General Manager at Motorcars" for the same five-year period. The SAC added one sentence of new factual detail in an additional paragraph, namely, that "Mercedes-Benz of Temecula opened for business on April 18, 2014." Like the initial complaint, the SAC alleged that "Jones and Motorcars breached the [underlying LOI contract with Mercedes-Benz] when they abruptly terminated Blumenthal without cause on or about August 24, 2017, less than five years after the Temecula dealership had opened."
The same pattern exists for the remaining causes of action in the complaint and the SAC; in fact, they were largely identical. The second cause of action in both complaints was for breach of contract. Blumenthal alleged he entered into an agreement with Mercedes-Benz, Jones, and Motorcars in October of 2012 "to develop a new Mercedes-Benz dealership in Temecula, California. The agreement is memorialized in [a] Letter Agreement." In both the complaint and the SAC, Blumenthal alleged the Letter Agreement also "provided that the terms of the LOI would continue to be in force . . . ."
In the complaint, Blumenthal alleged the Letter Agreement included the LOI's "requirement that Jones and Motorcars employ Blumenthal as General Manager at Motorcars until at least five years after" the planned Temecula dealership opened. The SAC again made the same nominal change to this language, alleging that the Letter Agreement and LOI required Jones and Motorcars to "provide Blumenthal with the 'opportunity' to remain General Manager at Motorcars" for the five-year period after the Temecula opening. The complaint and the SAC both alleged that, in exchange for Jones and Motorcar's agreement to continue to "employ Blumenthal as General Manager at Motorcars" (complaint) or, per the SAC, afford him "the 'opportunity' to remain General Manager at Motorcars" for five years, "Blumenthal agreed to partner with Jones to develop the new Temecula dealership."
Blumenthal's breach of contract cause of action in both the complaint and SAC identically alleged, "Any subsequent agreement that purports to limit the term of Blumenthal's employment as General Manager of Motorcars is void for lack of consideration and mutuality because Motorcars and Blumenthal had a preexisting obligation to employ Blumenthal under the LOI, Letter Agreement," and an oral contract between Jones and Blumenthal. The complaint included Jones's alleged breach of oral contract in the second cause of action for breach of contract, including breach of the written Letter Agreement, while the SAC labeled it as a "Third Cause of Action (Breach of Oral Contract)." The oral contract claim was not new in the SAC; the only change was the label identifying it as the third cause of action. The SAC also added more details about the alleged oral contract, including Blumenthal's claim that it did not violate the statute of frauds requiring a written contract.
The complaint's third cause of action, "Promissory Fraud," was similarly restated in the SAC, but labeled as the SAC's fourth cause of action because the SAC had divided the written and oral contract claims. The SAC repeated the complaint's promissory fraud allegations verbatim. Specifically, the gravamen of that claim was the allegation that "Jones, individually and on behalf of Motorcars, fraudulently induced Blumenthal to enter into [an] Agreement of Satisfaction. Jones and Motorcars promised that if Blumenthal agreed to give up valuable consideration—including his right to an ownership share in Motorcars and the [Fletcher Jones branded] Mercedes-Benz dealership in Henderson, Nevada—Jones and Motorcars would provide Blumenthal with the opportunity to own 100% of the new Temecula Mercedes-Benz dealership and would keep Blumenthal employed as General Manager at Motorcars until Blumenthal had the opportunity to purchase 100% of the new Temecula dealership."
Jones alleged in both his promissory fraud cause of action in the complaint and the SAC that "Jones and Motorcars did not intend to perform these promises when they made them to Blumenthal. Indeed, they always intended to breach these promises to Blumenthal."
Likewise, the complaint and SAC identically alleged a cause of action for "Rescission of the Agreement of Satisfaction," labeled as the complaint's fourth cause of action and the SAC's fifth cause of action. The SAC repeated the complaint's statement of the cause of action verbatim: as a result of Jones and Motorcars's alleged promissory fraud, "the Agreement of Satisfaction is subject to rescission under California Civil Code, Section 1689, subdivision (b)(1)."
Both the complaint and the SAC concluded: "Blumenthal is entitled to recover all consequential damages arising or resulting from the fraudulent conduct described herein, including without limitation, all damages arising from Blumenthal's relinquishment of his ownership interests in Motorcars and in the Henderson dealership, in an amount to be determined in accordance with proof at trial." The SAC added an additional paragraph stating, "Specifically, Blumenthal is entitled both to compensation for having been deprived of his ownership interests in Motorcars and the Mercedes-Benz dealership in Henderson, Nevada up to the present time, and to a judgment decreeing that Blumenthal still has such ownership interests." (Italics added.) This language was in the SAC's rescission cause of action, but Blumenthal had made the same allegation in the complaint as a separate cause of action entitled, "Sixth Cause of Action (Declaratory Relief)." In other words, while the SAC deleted the complaint's sixth cause of action for declaratory relief, the SAC included the same declaratory judgment request in the rescission cause of action.
The complaint and SAC both premised Blumenthal's request for a declaratory judgment that he had an ownership interest in Motorcars on the same facts. As the complaint phrased it: "Blumenthal contends that, by virtue of his sweat equity contribution to Motorcars, his responsibility for the management and control of Motorcars, and the understanding and statements of the parties, Blumenthal acquired a 15% ownership interest in Motorcars."
The complaint and SAC both alleged this ownership interest arose at the outset of the parties' relationship, when "Blumenthal and Jones agreed to work together on a handshake." The complaint and SAC both alleged Jones and Blumenthal "were partners in Motorcars" from the beginning, with Jones agreeing to a partnership arrangement in which "Blumenthal chose to contribute sweat equity to Motorcars, accepting 10% of the net profit and 5% of the gross profit," which was less than an alternate arrangement that would have paid Blumenthal more upfront. Instead, Blumenthal consented to "initially receiving less money from Motorcars while he worked to grow the business to reap the benefits over the long term."
The complaint and SAC both similarly asserted a co-ownership arrangement for the proposed Temecula Mercedes-Benz dealership, this time at Mercedes-Benz's behest. Both pleadings alleged: "Mercedes-Benz required that Blumenthal initially own 51% of the Temecula dealership and that Blumenthal be given the option to purchase all of Jones's interest in the future (the 'Blumenthal Option')." The complaint and SAC identically alleged that Mercedes-Benz favored this arrangement in part because of complaints by another local Mercedes-Benz dealer competing to own the Temecula dealership. If it were awarded to Jones, the other dealer complained, because of Jones's ownership of other Southern California dealerships "'I will face the same economic entity [i.e., Jones] to the North, South, East and West,' which would 'force [my dealership] into bankruptcy.'" Blumenthal alleged in both the complaint and the SAC, that in a May 2007 letter to Jones, "Mercedes-Benz stated that 'Mr. Blumenthal owning 100% of the interest in the new [Temecula] dealership . . . is preferred by [Mercedes-Benz].'"
The Blumenthal Option was the foundation for the "Promissory Estoppel" cause of action in the complaint and SAC based on Jones's alleged manipulation of the option. In both pleadings, Blumenthal alleged that Jones promised he could "remain [the] General Manager at Motorcars until he could exercise the Blumenthal Option" (complaint) on its "exercise date" (SAC). Specifically, while the exercise date under the Blumenthal Option originally was to occur within five years of the Temecula dealership opening, Jones induced Blumenthal to extend the purchase date to 10 years, with the promise that he could remain general manager for that full term.
Blumenthal added detail in the SAC, specifying that his reliance on Jones's promise, "individually and on behalf of Motorcars," to extend the exercise date to 10 years was a "substantial factor" in causing Blumenthal damage because it "deprived him of the opportunity to purchase the Temecula dealership at the contractually-specified discount [under the Blumenthal Option] within five years from the dealership's opening; that is, by April 2019." Blumenthal alleged Jones and Motorcars abruptly terminated him without cause in August 2017. In alleging promissory estoppel, both the complaint and the SAC claimed Blumenthal was entitled to damages for Jones's breach of his promise to extend the option period to 10 years and to employ him as general manager during that time.
Blumenthal's seventh and final cause of action in the complaint and the SAC was the same, breach of fiduciary duty. In both, Blumenthal alleged he and Jones "formed a joint venture and partnered to [attempt to] own and operate [a] Sydney Dealership." In the complaint, Blumenthal alleged Jones "breached the fiduciary duties he owed to Blumenthal when he failed to timely and reasonably inform Blumenthal that he was withdrawing the offer to purchase the . . . dealership."
Blumenthal added detail to these allegations in the SAC, but the gravamen remained the same: "In precipitously withdrawing the offer to purchase the Sydney Dealership at the last moment, Jones acted with malice to scuttle Blumenthal's opportunity to purchase the Sydney Dealership. This was a breach of Jones's fiduciary duty of loyalty to Blumenthal. Jones wanted to undercut Blumenthal to deprive him of the opportunity to co-own the flagship Mercedes-Benz dealership in Australia, because Jones did not want Blumenthal to threaten his dominance as a leading Mercedes-Benz dealer. Jones also wanted to control Blumenthal and keep him focused on the management of Motorcars until it suited Jones. [¶] Jones knew that Blumenthal had options other than Jones to finance the purchase of the Sydney Dealership. Had Blumenthal known that Jones planned to undercut him, Blumenthal would have succeeded in securing alternative financing and would have purchased the Sydney Dealership without Jones's participation. [¶] . . . Jones failed to inform Blumenthal that he would not be pursuing the Sydney Dealership until the last minute, when it was no longer possible for Blumenthal to line up an alternative source of financing."
2. Procedural History
Blumenthal filed his original complaint on July 2, 2018. On August 1, 2018, Jones filed a detailed demurrer. Jones challenged all seven causes of action on grounds that each failed as a matter of law "to state facts sufficient to constitute a cause of action." Jones also raised an additional challenge to Blumenthal's first two causes of action based on the LOI and the Letter Agreement, under which Blumenthal claimed a third party beneficiary or direct contract right to employment as Motorcars's general manager. Jones contended those causes of action failed as a matter of law for not "properly" alleging "the terms of the underlying contract, agreement, or promise."
Jones's demurrer also challenged Blumenthal's "Promissory Estoppel" cause of action alleging a right to employment as Motorcars's general manager for 10 years under Jones's alleged request—and Blumenthal's agreement—to delay the purchase date under the so-called Blumenthal option. Jones demurred on grounds this cause of action also "fails to allege properly the terms of the underlying contract, agreement, or promise." Jones similarly demurred to the sixth cause of action for declaratory relief and to the seventh cause of action related to the purchase of the Sydney dealership for not "properly" alleging the terms of their agreements. It is not clear what Jones meant by improperly alleged "terms." It appears he simply had a different understanding of the agreements Blumenthal alleged.
In the demurrer, Jones emphasized his view that Blumenthal's claims were employment-based. In reciting the underlying facts, Jones asserted he "hired Plaintiff to work at Motorcars" (italics added) and, while Blumenthal enjoyed a generous profit-sharing salary just as he alleged, this was still an industry-standard "pay plan." Jones stated, "Although he was an employee, Plaintiff now contends that he was Mr. Jones's 'partner' in the corporation," but Jones observed, "Plaintiff does not allege that he was issued any shares in Motorcars, he does not allege that he was the beneficial owner of any shares in Motorcars, and he does not allege that he complied with any corporate formalities whatsoever." Jones did not move to compel arbitration of the complaint as a whole or to the extent it alleged employment-based claims: instead he sought to have the trial court dispose of the matter in its entirety by demurrer.
On August 1, 2018, Jones also filed a motion to strike allegedly "improper references" in the complaint "regarding the ownership of Jones/Blumenthal Temecula LLC dba Mercedes-Benz of Temecula" on grounds that they related to a matter "which is subject to a pending arbitration." Jones's demurrer stated "[t]hat arbitration is moving forward," with a hearing scheduled in Clark County, Nevada. The trial court, however, denied Jones's request for judicial notice of all documentation Jones presented in the demurrer because it fell outside the statutory grounds for such notice. Jones did not challenge this ruling. Jones's demurrer also included, under the same heading in which it referenced the Nevada arbitration ("Pending Arbitration"), the following statement: "Mr. Jones and Motorcars hereby explicitly reserve, and do not waive, their rights to have all claims subject to arbitration agreements determined pursuant to such arbitration agreements. Moreover, as Plaintiff's lawsuit before this Court progresses, if Mr. Jones and Motorcars became [sic] aware or determine that Plaintiff's claims are subject to arbitration, they hereby explicitly reserve, and do not waive, their rights to compel arbitration."
On October 29, 2018, Blumenthal filed oppositions to the demurrer and the strike motion. In late November, the trial court denied the motion to strike because, even assuming "an arbitration is pending as to that question," i.e., ownership of the Temecula dealership, "the sections of the Complaint referring to th[at] dealership are provided as background information to the trier of fact [regarding] the relationship between the parties and the basis [of] some of Plaintiff's causes of action."
The trial court sustained the demurrer on several claims, including Blumenthal's first and second causes of action asserting third party beneficiary or direct contract rights to employment as Motorcars's general manager, and his "Promissory Estoppel" cause of action asserting a right to continued employment in that capacity until he could exercise his option to buy the Temecula dealership. The court, however, allowed Blumenthal leave to amend as to these three causes of action and two others. The court overruled the demurrer on two causes of action. The court did not sustain Jones's demurrer without leave to amend on any causes of action.
Meanwhile, on November 13, 2018, Jones filed its case management statement (CMS) in which it expressly requested a jury trial. Jones also stated, "This case will be ready for trial within 12 months of the date of the filing of the complaint," which was less than nine months away. Jones identified dates in September and October 2019 when it or counsel would not be available for trial, which Jones estimated would take 7 to 10 days. In its CMS, Jones indicated it was willing to participate in "Mediation" or a "Settlement Conference." Jones did not request the potential dispute resolution option, "binding private arbitration." Jones identified the Nevada arbitration in preprinted language as a "matter[] that may affect the court's jurisdiction or processing of this case," but it did not indicate any other potential arbitration or arbitration agreement that could alter the litigation trajectory.
Asked to list motions Jones might file before trial, Jones wrote on its CMS that "[i]f Defendants' Demurrer is not sustained, they likely will file a Motion for Summary Judgment." Jones did not identify a motion to compel arbitration as a likely motion before trial. Instead, Jones proposed cutoff dates for written discovery, depositions, and expert discovery, beginning within seven months, from June to October 2019. In conjunction with its CMS, Jones posted jury fees on November 13, 2018.
On November 28, 2018, the trial court held a case management conference. The court set the trial date for October 7, 2019, and the mandatory settlement conference for September 6, 2019.
In mid-December 2018, Blumenthal filed a first amended complaint (FAC) to "plead additional facts" or otherwise address the shortcomings the trial court identified in its demurrer ruling. The FAC did not allege any new causes of action, employment-related or otherwise.
In late December, Jones again demurred to all causes of action in Blumenthal's pleading, including those expressly asserting employment claims. Plaintiff filed an opposition and in March 2019, the trial court overruled the demurrer as to five counts, but sustained the demurer on two causes of action, including Blumenthal's second cause of action for breach of a written contract for employment and his sixth cause of action (Promissory Estoppel) regarding extension of his employment as general manager to a 10-year period under the Blumenthal Option. The trial court granted Blumenthal leave to amend on these two causes of action.
At the demurrer hearing on March 8, 2019, counsel for Jones suggested it would not be ready for trial by the October 7, 2019 trial date, which was still seven months away. The court replied that it did not intend to continue the trial date and that the parties therefore should proceed immediately with discovery.
Blumenthal had been attempting to engage in discovery for months by that time, having served inspection demands on Jones on January 4, 2019. Jones replied a month later, on February 4, 2019, objecting to each of the demands, but proposing a "meet and confer" process. On February 22, Blumenthal sent Jones a letter objecting to Jones's refusal to produce documents, but attached, as Jones had asked, a proposed stipulation and protective order. On February 28, Jones responded, restating its objections to the inspection demands and its intent to await the court's demurrer ruling on the FAC. Jones stated that "[a]fter the [demurrer] hearing" it "expect[ed] the parties w[ould] be in a better position to assess the impact of the pending Demurrer on Plaintiff's Inspection Demands." On March 7, the day before the demurrer hearing, the parties met and conferred by telephone. Jones continued to object to discovery at that time.
Blumenthal's follow-up letter on March 12, 2019, four days after the demurrer hearing, generated no response for almost a month. The letter reiterated Jones's obligation to conduct a "diligent search and a reasonable inquiry" to identify responsive documents. To assist Jones in that process, Blumenthal identified several key custodians likely to possess responsive material; he also attached a proposed list of custodians, date ranges, and search terms for Jones to use in locating responsive e-mails in Jones's electronic records.
On March 18, 2019, Blumenthal filed the SAC, restating the same claims from the original complaint, as detailed above. The SAC did not add any new employment-related claims; nor did it eliminate any.
On April 5, 2019, not having heard from Jones on his still-pending inspection demands, Blumenthal again wrote to Jones, demanding compliance. It had now been three months with no discovery produced. Jones responded by e-mail three days later, but declined to provide a projected date for compliance.
On April 10, 2019, Blumenthal filed a motion to compel compliance with his inspection demands. Blumenthal sought approximately $36,000 in sanctions, reflecting his costs and fees in his so far fruitless discovery quest.
The next day, on April 11, 2019, counsel for Jones left a voicemail for Blumenthal's counsel stating that Jones wanted to arbitrate the case. Jones filed its motion to compel arbitration on April 19, 2019.
Jones offered this rationale for the motion: "The allegations in Plaintiff's Second Amended Complaint . . . now make clear that this case is an employment dispute between Plaintiff and his former employer, [Fletcher Jones]. In short, Plaintiff now alleges various claims all rooted in his employment at Motorcars or termination therefrom. Because each cause of action is related to his employment, and indeed expressly alleges his employment as its basis, each cause of action must be compelled to arbitration pursuant to the binding arbitration agreement Plaintiff signed in 2009 (the '2009 [a]rbitration [a]greement')." (Italics added.)
The 2009 arbitration agreement was included in a two-page "Employee Acknowledgment and Agreement" (EAA) that Blumenthal signed in April of that year. The EAA stated that it "supersedes all prior agreements, understandings, and representations (whether written or oral) concerning my employment with the Dealership." The EAA also stated, "The Dealership retains the right to add, change, or delete wages, benefits, policies, and all other working conditions at any time (except the policy of 'at-will employment' and [the] Arbitration Agreement, which may not be changed, altered, revised or modified without a written agreement signed by both myself and the President of the Dealership)."
The EAA's arbitration provision described its application as follows: "[T]he Dealership and I will utilize binding arbitration to resolve all disputes that may arise out of the employment context. Both the Dealership and I agree that any claim, dispute, and/or controversy that either I may have against the Dealership (or its owners, directors, officers, managers, employees, agents, and parties affiliated with its employee benefit and health plans) or the Dealership may have against me, arising from, related to, or having any relationship or connection whatsoever with my seeking employment with, employment by, or other association with the Dealership[,] shall be submitted to and determined exclusively by binding arbitration under the Federal Arbitration Act, in conformity with the procedures of the California Arbitration Act (Cal. Code Civ. Proc. [§] 1280 et seq., including section 1283.05 and all of the Act's other mandatory and permissive rights to discovery)."
The arbitration clause provided that the arbitrator "shall be a retired California Superior Court Judge, or otherwise qualified individual to whom the parties mutually agree . . . ." The arbitration agreement expressly provided that demurrers were to be brought in the arbitral forum. It specified: "All rules of pleading (including the right of demurrer), all rules of evidence, all rights to resolution of the dispute by means of motions for summary judgment, judgment on the pleadings, and judgment under Code of Civil Procedure [§] 631.8 shall apply and be observed."
Blumenthal opposed Jones's motion to compel arbitration. In a detailed statement of decision, the trial court denied the motion, finding bad faith and a waiver by Jones of arbitration. The court expressly found: "In this case, Defendants knew from the beginning that the 2009 arbitration agreement existed and that it covered most of the claims raised in the Original Complaint. But they chose to litigate the case in this Court for over nine months, attempting to dispose of the case through two demurrers and a motion to strike, and arranging for the scheduling of a jury trial. They also engaged in discovery conduct similar to that described in Adolph, [supra, 184 Cal.App.4th 1443], engaging in a months-long meet-and-confer process regarding discovery demands without ever producing documents. They did not request arbitration or file a motion to compel arbitration until after their demurrers were largely overruled and Plaintiff had filed a motion to compel discovery and impose sanctions on Defendants. All the while, they would have been aware that Plaintiff was incurring substantial costs in litigating the case, and that referring the case to arbitration would entail a stay of these proceedings and delay any decision on the merits of Plaintiff's claims. It is apparent that this was part of a deliberate strategy by Defendants to use the litigation process to their advantage if possible, and pursue arbitration only if that failed."
The court further observed, "That Defendants' conduct was deliberate is reinforced by their conduct in Fletcher Jones[, supra, Cal.App.4th 436] and the defendants' conduct in Adolph[, supra, 184 Cal.App.4th 1443], in which the defendant was represented by Defendants' current counsel [Arent Fox]. In both cases, the defendants intentionally chose to seek disposal of the case in litigation through demurrers and stall discovery in the interim, while planning to pursue arbitration if that approach failed. And in both cases, the defendants appealed the denial of their motions to compel arbitration, which further delayed the litigation, as Defendants have indicated they plan to do in this case. Although the Court of Appeal has warned against this tactic, it appears that Defendants have elected to take the same approach in this case."
The trial court also found Jones waived arbitration based on (1) conduct inconsistent with an intention to arbitrate, (2) unreasonable delay in seeking arbitration, and (3) prejudice to plaintiff. Jones now appeals.
DISCUSSION
1. Waiver
Jones contends the trial court erred in finding it waived arbitration. "California law favors arbitration[] as a relatively quick and cost-effective means to resolve disputes." (Burton v. Cruise (2010) 190 Cal.App.4th 939, 944 (Burton).) There is a statutory exception, however, where the "right to compel arbitration has been waived" by the moving party. (Code Civ. Proc., § 1281.2, subd. (a); Burton, at p. 944.) Federal law similarly recognizes arbitration may be waived. (Zamora v. Lehman (2010) 186 Cal.App.4th 1, 12 (Zamora).) Specifically, waiver is consistent with the Federal Arbitration Act (9 U.S.C. § 1 et seq.) under which arbitration agreements are ineffective "upon such grounds as exist at law or in equity for the revocation of any contract." (9 U.S.C. § 2; accord, § 1281; Fletcher Jones, supra, 205 Cal.App.4th at p. 444, citing § 1281.)
All further undesignated statutory references are to this code.
"Although the statute speaks in terms of 'waiver,' the term is used '"as a shorthand statement for the conclusion that a contractual right to arbitration has been lost."'" (Burton, supra, 190 Cal.App.4th at p. 944.) "This does not require a voluntary relinquishment of a known right; to the contrary, a party may be said to have 'waived' its right to arbitrate by an untimely demand, even without intending to give up the remedy. In this context, waiver is more like a forfeiture arising from the nonperformance of a required act." (Ibid.)
"Whether a party waived the right to contractual arbitration is a factual question we review under the substantial evidence standard of review." (Fletcher Jones, supra, 205 Cal.App.4th at p. 443.) "The trial court's 'determination of this factual issue, '"if supported by substantial evidence, is binding on an appellate court.""" (Ibid.) "Based on the public policy favoring arbitration, claims of waiver receive 'close judicial scrutiny' and the 'party seeking to establish a waiver bears a heavy burden.'" (Id. at p. 444.) Nevertheless, "[l]ike the 'clear and convincing' standard of proof, these higher burdens guide the trial court's determination, but do not alter the standard of review on appeal." (Burton, supra, 190 Cal.App.4th at pp. 945-946.)
Jones contends our review should be de novo because the trial court's ruling "was based solely on undisputed evidence: review of the record of the parties' pleadings and the dates on which they were filed." Jones notes that "[t]he parties did not present witnesses at the hearing on the Motion to Compel Arbitration."
The presence or absence of witnesses is not determinative. None of the cases articulating California's "well defined" law on the issue of waiver hold as much. (Keating v. Superior Court (1982) 31 Cal.3d 584, 605, overruled on other grounds in Southland Corp. v. Keating (1984) 465 U.S. 1, 16.) To the contrary, only "'in cases where the record before the trial court establishes a lack of waiver as a matter of law, [may] the appellate court . . . reverse a finding of waiver made by the trial court.'" (Ibid.) As our high court has explained, this limited circumstance arises when '"only one inference may reasonably be drawn"' from the facts before the trial court. (St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1196 (St. Agnes).)
De novo review is particularly inapt here where the trial court found bad faith. '"'"[B]ad faith' or 'willful misconduct' of a party may constitute a waiver and thus justify a refusal to compel arbitration."'" (St. Agnes, supra, 31 Cal.4th at p. 1196.) Dilatory conduct that is "arguably unreasonable or undertaken in bad faith . . . may provide sufficient grounds for a trier of fact to conclude that [a party] has in fact waived its arbitration agreement." (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 984.) "[T]he delay must be substantial, unreasonable, and in spite of the claimant's own reasonable diligence." (Ibid.) The substantial evidence standard governs (id. at p. 983) because the question of "bad faith is essentially factual: therefore, the proper standard of review is substantial evidence." (People v. Memro (1995) 11 Cal.4th 786, 831.)
During oral argument, counsel for appellants suggested the court made no such finding—that the "bad faith' language in the trial court's statement of decision was a mistake. We disagree. In fact, as we will discuss at some length below, we find no basis in this record for such a contention. --------
General principles governing a finding of waiver, whether or not bad faith is involved, include: "'"(1) whether the party's actions are inconsistent with the right to arbitrate; (2) whether 'the litigation machinery has been substantially invoked' and the parties 'were well into preparation of a lawsuit' before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) 'whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place'; and (6) whether the delay 'affected, misled, or prejudiced' the opposing party.""' (St. Agnes, supra, 31 Cal.4th at p. 1196.) These factors are not exhaustive, nor are all necessarily pertinent in every case. (Burton, supra, 190 Cal.App.4th at pp. 945-946.) "[N]o single test delineates the nature of the conduct that will constitute a waiver of arbitration." (St. Agnes, at p. 1195.)
Adolph guides our review because the bad faith conduct evident in that case so closely mirrors the conduct the trial court condemned here. Indeed, it is beyond coincidence the attorneys committing the bad faith conduct in Adolph are the same lawyers representing Jones in this action. One may reasonably infer Arent Fox chose to ignore Adolph, rendering their conduct all the more egregious. In Adolph another panel of this court expressly held, "We are loathe to condone conduct by which a defendant repeatedly uses the court proceedings for its own purposes (challenging the pleadings with demurrers) while steadfastly remaining uncooperative with a plaintiff who wishes to use the court proceedings for its purposes (taking depositions), all the while not breathing a word about the existence of an arbitration agreement, or a desire to pursue arbitration, and, in fact, withholding production of the arbitration agreement until after the demurrer hearing on the day the demurrer is overruled." (Adolph, supra, 184 Cal.App.4th at p. 1452.) "[I]n Adolph, we recognized that a party could not blow hot and cold by pursuing a strategy of courtroom litigation only to turn towards the arbitral forum at the last minute, thereby frustrating the goal of arbitration as a speedy and relatively inexpensive means of dispute resolution . . . ." (Burton, supra, 190 Cal.App.4th at p. 945.)
In Adolph, Arent Fox's client filed its petition to compel arbitration on January 28, 2009, slightly more than three months before the trial date set for May 11, 2009. (Adolph, supra, 184 Cal.App.4th at p. 1452.) The trial court there concluded, "To allow defendant at this time with a trial set for May when it has known of its right to arbitrate this matter since June 2008 yet remained silent until it lost its motion to now go to arbitration would in this court's view cause an unnecessary waste of time and effort to all concerned[,] but more importantly is unfair and prejudicial to plaintiff." (Adolph, supra, 184 Cal.App.4th at pp. 1451-1452, fn. omitted.) Here, Jones sought arbitration in late April 2019, just over five months before the October 7 trial date.
The trial court properly found Jones "knew from the beginning that the 2009 arbitration agreement existed." As courts routinely explain, "[O]ne who assents to a contract is bound by its provisions and cannot complain of unfamiliarity with the language of the instrument." (Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 710; see, e.g., Zimmerman v. Drexel Burnham Lambert Inc. (1988) 205 Cal.App.3d 153, 159 (Zimmerman) [applying principle to arbitration clauses].) While it is also true that Blumenthal knew of the provision, having signed it, this does not bear on the waiver question. Simply put, nothing prevents a party to an arbitration clause "from resorting initially to an action at law" because such provisions are not "'self-executing.'" (Brock v. Kaiser Foundation Hospitals (1992) 10 Cal.App.4th 1790, 1795.)
We therefore find poorly-reasoned the analysis in a small number of federal decisions characterizing a plaintiff's situation as "self-inflicted" for enduring lengthy and costly litigation, only to be shunted out to belated arbitration. (Fisher v. A.G. Becker Paribas Inc. (9th Cir. 1986) 791 F.2d 691, 698; Richards v. Ernst & Young, LLP (9th Cir. 2013) 744 F.3d 1072, 1075.) Instead, although clearly involving arbitral issues, "[f]or reasons of their own, the parties may choose to litigate such questions." (Mercury Ins. Group v. Superior Court (1998) 19 Cal.4th 332, 346.) Where the defendant has done so, it has no cause to complain of a finding that its conduct is inconsistent with an intent to arbitrate. This is particularly true when, as here, the record supports a bad faith finding.
As the trial court found, Jones and counsel "chose to litigate the case in this Court for over nine months, attempting to dispose of [it] through two demurrers and a motion to strike, and [they] schedul[ed] a jury trial. They also engaged in discovery conduct similar to that described in Adolph, engaging in a months-long meet-and-confer process regarding discovery demands without ever producing documents. They did not request arbitration or file a motion to compel arbitration until after their demurrers were largely overruled and Plaintiff had filed a motion to compel discovery and [to] impose sanctions on Defendants."
The trial court in Adolph recounted a similar series of events: '"[I]t is apparent to the court that defendant's conduct has been inconsistent with an intent to arbitrate. Related to this is the 6 months of delay from the filing of Plaintiff's complaint to the instant petition to compel. In that time period defendant filed two demurrers, accepted and contested discovery request[s], engaged in efforts to schedule discovery, [and] omitted to mark or assert arbitration in its case management statement. [¶] 'The effect of these inconsistent actions by defendant has resulted in more than merely participating in litigation or expending legal cost[s] but in prejudice to the plaintiff by substantially undermining plaintiff's ability at this late date to take advantage of the benefits and cost savings provided by arbitration. It is clear to the court that defendants intended by their conduct to proceed with their court action. It was [not] until defendant's second demurrer was overruled that it now request[s] . . . another forum . . . ."' (Adolph, supra, 184 Cal.App.4th at p. 1451.)
Jones observes that the trial court in Adolph did not expressly find bad faith, but that does not help Jones because the trial court clearly did so here. The court this time simply made explicit what was obvious in Adolph. As we stated there, "the tone of [the] ruling is suggestive of such a finding and . . . sufficient evidence would have supported the finding." (Adolph, supra, 184 Cal.App.4th at p. 1452.) In Adolph we lamented, "To believe that defendant was not aware of its late-asserted right to arbitrate until plaintiff filed its SAC strains our imagination to the breaking point." (Ibid.) We have the same reaction to the justifications Jones has advanced here.
Jones contends it sought arbitration after the SAC was filed because it was only then that Blumenthal "began morphing the case into an employment case via his two subsequent amendments." Below, Jones grounded its motion to compel arbitration on the same dubious premise, claiming the allegations in the SAC "now make clear that this case is an employment dispute between Plaintiff and his former employer . . . . In short, Plaintiff now alleges various claims all rooted in his employment at Motorcars or termination therefrom." (Italics added.) Jones asserted only the SAC made evident that "each cause of action is related to his employment, and indeed expressly alleges his employment as its basis."
This characterization of the SAC was patently false. In our lengthy recitation above, we painstakingly compared the SAC to the original complaint to demonstrate that Jones's pretext for its belated motion was transparently false. The SAC did not change the nature or even the number of Blumenthal's claims. Jones suggests Blumenthal "dropped from his subsequent amended complaints" the "sixth cause of action in the original Complaint" for declaratory relief of an ownership interest in Motorcars. Not so. Blumenthal moved the claim up to the fifth cause of action for rescission of a purported agreement of satisfaction eliminating his ownership interest. Blumenthal expressly still sought "a judgment decreeing that Blumenthal still has such ownership interests" not only in Motorcars, but also in a Nevada dealership.
Jones asserts a pleading change is somehow evident in the fact that the complaint "used the words 'own,' 'ownership,' 'co-own,' and 'partner/partnership' 69 times in attempting to state claims based on the notion that Blumenthal was a co-owner of dealerships with Mr. Jones." Notably, however, Jones does not tabulate those same words in the SAC. Blumenthal did so—finding they increased to "67 references to 'own,' 15 to 'ownership,' 6 to 'co-own,' and 22 to 'partner.'" In contrast, the original complaint—in which Jones implied it was impossible to discern a basis for arbitration pursuant to Blumenthal's employment agreement—used "employment," "employee," and similar words 85 times.
Jones claims that while Blumenthal's "seventh cause of action in the original Complaint and SAC are the same cause of action (breach of fiduciary duty related to the Sydney venture), . . . he morphed the allegations from those in the original Complaint based on a joint venture/partnership . . . to employment-based allegations in the SAC." Again not so. The first substantive line of the SAC's seventh cause of action alleges "Jones and Blumenthal formed a joint venture and partnered to own and operate the Sydney dealership." There was no "morphing" toward employment claims in the seventh cause of action.
The point is that, with no less than 85 references to employment in the original complaint—and no more in the SAC—the arbitrability of Blumenthal's claims was as evident at the outset of litigation as Jones claims it became with the SAC. If—and it is a very big "if" in light of Jones's squandered credibility—Jones had concerns initially that some of Blumenthal's claims may not have been arbitrable, he could have sought severance and arbitration of those claims that clearly were. Section 1281.4 provides for such severance, arbitration of those claims, and a stay of further litigation on those claims pending the arbitration. (Ibid. ["If the issue which is the controversy subject to arbitration is severable, the stay [of litigation] may be with respect to that issue only"].) And if there are claims that are not subject to arbitration, but bear enough on the arbitrable ones that "a determination of such issues may make the arbitration unnecessary, the court may delay its order to arbitrate until the determination of such other issues" in litigation. (§ 1281.2, subd. (d).)
The trial court determined Jones lacked credibility on the arbitration issue. Credibility is "'quintessentially a factual inquiry'" (In re Lawley (2008) 42 Cal.4th 1231, 1241), and though no witnesses testified, Jones and its attorneys appeared before the court, and that court was entitled to determine the believability of Jones's morphology claim on which it predicated its motion to compel arbitration. The trial court's bad faith determination reflects its conclusion. Factually, the lack of material differences between the complaint and SAC amply supports the trial court's determination. None of the additions made Blumenthal's claims in the SAC more or less employment-related.
The trial court reached the same conclusion rejecting Jones's "reservation of a rights" paragraph in both the demurrers. The trial court found, and the foregoing evidence amply supports the court's conclusion, that the "purported reservation of rights is both ineffective and misleading. Nothing in Fletcher Jones, Adolph, St. Agnes, or the other cases setting out the waiver factors allows a party to circumvent the waiver analysis by including a generic 'reservation of rights' provision in pleadings, nor is such a reservation deemed among the factors to be considered. Moreover, the cited reservation language is conditional: it states what will happen 'if' Defendants 'become aware' that an arbitration agreement applies. As discussed [however], Defendants have known from the beginning of this case that the 2009 Arbitration Agreement exists and that Plaintiff's claims are largely related to his employment at Motorcars. Their purported reservation of rights is thus ineffective."
The trial court did not err in its analysis. Even a stipulation creating an agreement between counsel that demurrers would not trigger waiver of arbitration does not preclude a judicial finding of waiver. Other conduct inconsistent with an intent to arbitrate may amount to a waiver. (Berman v. Health Net (2000) 80 Cal.App.4th 1359, 1365.) And, here, Jones's purported reservation was unilateral rather than by agreement. The trial court reasonably could find the reservation ineffective when its predicate—the matter "becoming" arbitrable when it hadn't been before—was absent.
Other distinctions Jones asserts on appeal are also without merit. Jones suggests the matter became arbitrable with the filing of the SAC because the "original Complaint [had] alleged partnerships and joint ventures in order to establish a basis for requesting $100+ million in lost-profits damages—a type of damages typically not associated with employment claims and a damages figure far in excess of any conceivable employment claim." Jones omits, however, the fact that the SAC made the same claim for "damages that well exceed $100 million." Thus, the assertion that the SAC somehow revealed all Blumenthal's claims to be employment-related and therefore arbitrable—when in the complaint they hadn't been—is specious.
Furthermore, although the damages claimed are substantial, Jones concedes Blumenthal—as an employee—was "paid on the order of millions of dollars per year." If the Blumenthal Option entitled him to 10 or more years of continued employment, then together with his punitive damages claim for promissory fraud, the $100 million figure—staggering as it is—may not be out of the range of possibility for an employment claim.
Jones's argument related to the "business tort" box that Blumenthal checked on the civil case cover sheet filed with the original complaint is, as Blumenthal observes, "difficult to take seriously." Jones asserts the fact Blumenthal did not check the cover sheet's "employment" box amounted to "gamesmanship" by Blumenthal to "plead around the arbitration agreement" by obscuring the nature of his claims, thereby justifying Jones's belated motion to compel arbitration when it became evident the claims were employment-related. The cover sheet, however, only allows a plaintiff to check one box ("Check one box below"), even if multiple boxes may be applicable. The cover sheet, moreover, is for the court's use "for statistical purposes and may affect the assignment of a complex case." (Cal. Rules of Court, rule 3.220(a).) A plaintiff's claims are stated in his or her pleadings, not on an administrative cover sheet. The employment-related nature of Blumenthal's claims was a constant from the original complaint through the SAC. Jones's unfounded rationale for belatedly seeking arbitration supported the trial court's bad faith finding.
Jones contends that filing successive demurrers is not litigation activity because demurrers are neither an answer nor a counterclaim, nor—according to Jones—do they otherwise constitute litigation on the merits of a plaintiff's claims. Jones reasons demurrers therefore should not count against a party later petitioning for arbitration as conduct inconsistent with an intent to arbitrate. In St. Agnes, the Supreme Court held that a defendant's motion challenging the venue a plaintiff selected for litigation did not involve judicial adjudication of the merits of a plaintiff's claims, and therefore did not weigh against the defendant's subsequent petition for arbitration. (St. Agnes, supra, 31 Cal.4th at p. 1201.) But demurrers are not motions to change venue. In Fletcher Jones, this court rejected Jones's claim that a demurrer does not amount to merits litigation.
There we observed, "Fletcher Jones fails to recognize it engaged in actual litigation of the merits by filing its demurrers challenging Lewis's claims." (Fletcher Jones, supra, 205 Cal.App.4th at p. 450.) A party obtaining judgment after successfully demurring to the plaintiff's claims would be astounded to learn the judgment was not on the merits. To the contrary, "a demurrer results in a substantive ruling on the merits because '[a] motion for judgment on the pleadings is equivalent to a general demurrer . . . .'" (Ibid.) Both result in a merits determination because "[b]oth attack the complaint on the ground the plaintiff failed to allege sufficient facts to constitute a cause of action." (Id. at pp. 450-451.)
Curiously, Jones ignores Fletcher Jones. Instead Jones relies on Groom v. Health Net (2000) 82 Cal.App.4th 1189 (Groom) for the proposition that filing a demurrer "is not the equivalent of litigation on the merits." (Id. at p. 1195.) Jones's reliance on Groom is misplaced. Groom preceded Fletcher Jones and Burton, both of which criticized Groom.
Jones contends that because St. Agnes cited Groom, it is "still good case law," but St. Agnes did so for the proposition that litigation expense alone is not enough to establish prejudice for waiver purposes. (St. Agnes, supra, 31 Cal.4th at p. 1203.) As we explained in Burton, which followed St. Agnes, "Groom . . . erred in failing to recognize that a petitioning party's conduct in stretching out the litigation process itself may cause prejudice by depriving the other party of the advantages of arbitration as an 'expedient, efficient and cost-effective method to resolve disputes.'" (Burton, supra, 190 Cal.App.4th at p. 948.) Because Groom ignored "the prejudice that may arise from multiple demurrers and the delay they cause" that is at odds with arbitration (Fletcher Jones, supra, 205 Cal.App.4th at p. 451 (italics added)), we continue to believe that "Groom [] is the odd man out." (Burton, at p. 948.)
In any event, the specifics of the parties' arbitration clause here show Jones's choice to litigate the matter was inconsistent with an intent to arbitrate and ultimately supported the trial court's bad faith finding. The agreement on which Jones eventually sought arbitration specified that the parties had "the right of demurrer" in the arbitral forum. Jones ignored this provision, choosing the litigation forum instead for successive demurrers. Jones suggests it did so because a party "should not be forced to compel arbitration of non-cognizable claims . . . ." But Jones ignores that it chose this restriction for itself in the arbitration agreement. As discussed above, litigating multiple demurrers in the judicial forum rather than in arbitration was inconsistent with an intent to arbitrate. "'"The courtroom may not be used as a convenient vestibule to the arbitration hall so as to allow a party to create his own unique structure combining litigation and arbitration."'" (Guess?, Inc. v. Superior Court (2000) 79 Cal.App.4th 553, 558.)
The fact that Jones requested arbitration only after its demurrers failed to remove any of Blumenthal's causes of action, or indeed achieve any material change to the pleadings, creates a strong odor of forum shopping. We are loathe to condone such a subversion of the judicial process and of the public policy in favor of arbitration. That public policy is grounded in enforcing the parties' mutual forum choices, whether to arbitrate their claims as originally agreed or, by their actions, to mutually continue to litigate them instead. As in Adolph, we will not allow the policy to be hijacked by a party acting in bad faith.
Jones contends "[i]t is not clear that the trial court actually intended to make a finding of bad faith." Jones cites the fact that the court's prehearing tentative ruling on Jones's motion to compel arbitration actually granted the motion. We may not speculate on the reasons for a change in the tentative ruling, nor may a party invoke a tentative ruling "'to impeach the final order.'" (Fletcher Jones, supra, 205 Cal.App.4th at p. 442, fn. 1.) The same is true of the court's minute order, and the court's initial statement of decision. "'It is settled that a trial judge's antecedent remarks or opinions, not embodied in his written findings or judgment, may not be used to attack or impeach the findings or judgment.'" (Ibid.)
The trial court's final statement of decision reflects its ultimate conclusion here, and it unequivocally states a bad faith finding in the heading, "Defendants have acted in bad faith," and in three detailed paragraphs explaining and supporting the finding. In our experience (including in this case), it is an unpleasant but necessary task—always reluctantly undertaken—to find that a party and all the more so its attorneys as officers of the court, have engaged in bad faith. The fact that the trial court made a bad faith finding when it could have relied solely on other waiver grounds demonstrates unambiguously that the court intended to do so. Jones's contrary assertion has no merit.
Finally, we address one issue of prejudice. We find the trial court's prejudice finding is supported by substantial evidence. "Arbitration loses much, if not all, of its value if undue time and money is lost in the litigation process preceding a last-minute petition to compel." (Burton, supra, 190 Cal.App.4th at p. 948.) "[T]he critical factor in demonstrating prejudice is whether the party opposing arbitration has been substantially deprived of the advantages of arbitration as a '"'speedy and relatively inexpensive"'' means of dispute resolution." (Ibid.) In Adolph, the trial court found prejudice where the defendant "substantially undermin[ed] plaintiff's ability at this late date to take advantage of the benefits and cost savings provided by arbitration." (Adolph, supra, 184 Cal.App.4th at p. 1451.) As the court noted, with only a few months remaining before trial, "Starting anew in an arbitral forum . . . would delay resolution of the dispute, not advance it." (Id. at p. 1452.)
These same considerations apply here. While Jones used the litigation process for its own purposes for nine months, during that same period Jones dithered without responding to Blumenthal's January demand for Jones to search its e-mail records. Jones then proposed a meet and confer process, only to write after another month had passed, on February 28, that it was not interested in responding at all before its second demurrer was heard, which did not take place until March 8. Then Jones ignored Blumenthal's follow-up demand to resume the discovery process for another month. Blumenthal filed his SAC on March 18, and then again heard nothing from Jones for weeks. When Blumenthal inquired about discovery on April 5, Jones responded by e-mail on April 8, once again declining to provide a projected compliance date. Blumenthal filed his motion to compel on April 10, having received no discovery since his January 4 demand. The next day, on April 11, 2019, counsel for Jones left a voicemail for Blumenthal stating that Jones wanted to arbitrate the case, and Jones filed its motion to compel arbitration on April 19, 2019.
The trial court reasonably could infer from this pattern of behavior that Jones abused the litigation process by engaging in a strategy of litigation "for me, but not for thee." Then, Jones's belated arbitration demand would reset the clock to start all over again in a new forum before a new decisionmaker. Not only would the new decisionmaker need to get up to speed on a complex matter in which the record already exceeded 1000 pages, nothing the parties or the trial court had done would have any binding effect. Jones would be free to reargue, refine, and rehash its demurrers all over again in the new forum.
Additionally, Jones indicated at the March 8 hearing on its second demurrer that it would not be ready for the October 7 trial date. While the trial court replied that it did not intend to continue the jury trial as Jones requested, substantial evidence supports the trial court's finding that, "[b]y delaying their request, Defendants have ensured that it would be virtually impossible for the arbitration to be completed by the October 7, 2019 trial date. This has deprived Plaintiff of a speedy and efficient dispute resolution procedure, and is inherently prejudicial." We agree.
Jones argues that by vacating the hearing on Blumenthal's motion to compel discovery and for sanctions, the trial court's denial of Jones's motion to compel arbitration violated Jones's due process rights. We disagree. The trial court postponed the hearing on Blumenthal's discovery motion at Jones's request. The court did so at the hearing on Jones's motion to compel arbitration (MCA). The court's minute order regarding Jones's MCA states: "At oral argument counsel for defendant also requested that if the court were to change its tentative ruling and deny the [MCA], that defendant be given more time to file its opposition to the discovery motion that is currently set for hearing on 5/31/19." The court granted Jones's oral request, as reflected in its minute order: "On court's own motion, plaintiff, Garth Blumenthal's Motion to Compel Production [is] continued from 05/31/2019 to 06/14/2019 at 9:00 AM in this department."
On June 13, 2019, Jones appealed the trial court's denial of its MCA. In other words, by appealing, Jones prevented the very hearing it now claims was necessary for due process since denial of a motion to compel arbitration stays all trial court proceedings. (Prudential-Bache Securities, Inc. v. Superior Court (1988) 201 Cal.App.3d 924.)
In postponing the hearing on the discovery motion, the trial court did not strike from the record the exhibits Blumenthal attached to it, including the declaration of his attorney, Joshua M. Robbins, which attested to and included the correspondence between the parties regarding discovery. Both sides incorporated the Robbins declaration and related exhibits regarding discovery into the record on the motion to compel arbitration. Specifically, Jones's MCA stated it was "based on . . . the pleadings and papers on file in this action, and such further evidence as may be presented at or before the hearing on this matter." (Italics added.) Those "pleadings and papers" necessarily included the discovery motion, declaration, and exhibits, which Blumenthal referenced in support of his opposition to the MCA.
Thus, the Robbins declaration and exhibits were before the trial court as evidence at the hearing on Jones's MCA. It is well-established that a litigant "may incorporate previously filed documents" by reference in his or her moving papers. (Roth v. Plikaytis (2017) 15 Cal.App.5th 283, 291; see, e.g., Larsen v. Johannes (1970) 7 Cal.App.3d 491, 496 ["The notice of motion indicated reliance upon all the files in this action, and the pleadings incorporating the documentation. This was sufficient to bring them before the court"].) Jones had the opportunity to cross-examine Robbins at the MCA hearing and to challenge any of the exhibits that were attached to the Robbins declaration. Jones did not do so.
In any event, a ruling on Blumenthal's motion to compel discovery responses or his corresponding motion for sanctions was not necessary for the trial court's decision to deny Jones's motion to compel arbitration. The court reasonably could infer in support of its bad faith finding to deny the MCA that in protracting the meet and confer process—during which Jones admitted it had no intent to undertake any discovery in response to Blumenthal's requests until after a ruling on its second demurrer—Jones intended to use the litigation process only for its own purposes and not in good faith. There was no due process violation.
2. Sanctions
Blumenthal contends Jones and its counsel have prosecuted a frivolous appeal, and he seeks sanctions for having to respond. Blumenthal sought an early dismissal and sanctions at the outset of the appeal, but as we explained in an order denying the request, dismissal is generally not available when it requires consideration of the merits of the appeal. Having now considered the merits, we conclude sanctions are appropriate.
Section 1294 authorizes appeals of orders denying a motion to compel arbitration. It does not authorize frivolous appeals.
"When it appears to the reviewing court that the appeal was frivolous or taken solely for delay, it may add to the costs on appeal such damages as may be just." (§ 907.) California Rules of Court, rule 8.276(a), similarly provides that the court may "impose sanctions . . . on a party or an attorney for: [¶] (1) Taking a frivolous appeal or appealing solely to cause delay. . . ."
"[A]n appeal may be frivolous under either a subjective standard which examines the motive of the appellant and counsel, or an objective standard which examines the merits of the appeal from a reasonable person's perspective." (Zimmerman, supra, 205 Cal.App.3d at p. 163; accord, In re Marriage of Flaherty (1982) 31 Cal.3d 637.) The reviewing court therefore may impose sanctions if "the appeal was subjectively or objectively frivolous or was taken solely for the purpose of delay." (Zimmerman, supra, 205 Cal.App.3d at p. 164.) "The two standards are often used together, with one providing evidence of the other. Thus, the total lack of merit of an appeal is viewed as evidence that appellant must have intended it only for delay." (In re Marriage of Flaherty, at p. 649.)
In Zimmerman, the trial court denied a motion to compel arbitration based on the defendant's lengthy delay in filing the motion, which the trial court found was "brought in bad faith and for the purpose of delay, based on counsel's failure to make the request sooner [having "known about the arbitration clauses for . . . years"] and contradictory statements under oath." (Zimmerman, supra, 205 Cal.App.3d at p. 159.)
The reviewing court dismissed the appeal as frivolous and dilatory and awarded sanctions against the appellant. The court found "that at least the portion of the appeal which was directed to the finding of waiver was objectively frivolous," and awarded the respondents their corresponding attorney fees in the amount of $9,000. (Zimmerman, supra, 205 Cal.App.3d at pp. 164-165.)
The Zimmerman court explained that in light of well-established case law on the subject of waiver and "the palpably weak excuse offered for the six-year delay [in seeking arbitration], no reasonable attorney could have believed that this court would find, as a matter of law, that Drexel had not waived its right to arbitration." (Zimmerman, supra, 205 Cal.App.3d. at p. 164.) The same objective standard requires sanctions here. The justification Jones and its attorneys crafted for belatedly seeking arbitration was so palpably weak when the SAC and original complaint are compared side-by-side that the argument offered both in the trial court and here can only be deemed to be objectively frivolous and prosecuted in bad faith.
DISPOSITION
The trial court's order denying Jones's MCA is affirmed. Blumenthal is entitled to his costs on appeal. We also grant Blumenthal's motion for sanctions against Jones for pursuing an objectively frivolous appeal in bad faith. Blumenthal shall recover his attorney fees in the amount of $40,000 from, jointly and severally, Fletcher Jones, Jr., Fletcher Jones Motorcars, Inc., and their counsel, Arent Fox and Fisher & Phillips.
GOETHALS, J. WE CONCUR: O'LEARY, P. J. ARONSON, J.