Opinion
A131053
12-27-2011
ROBERT GENOVA et al., Plaintiffs and Respondents, v. CSRware, INC. et al., Defendants and Appellants.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(San Francisco City & County Super. Ct. No. CGC-10-495810)
Plaintiffs went to work in the infancy of a start up software company, one as a vice-president of engineering and the other as a creative director. They later sued the company and its owner on several grounds, including breach of contract and failure to pay proper compensation. The matter proceeded as typical litigation. Plaintiffs and defendants conducted discovery and filed case management statements indicating a request for jury trial. Then, after almost a year of litigation and three months before trial, defendants demanded arbitration under a letter offer of employment. The trial court found defendants had waived arbitration and denied the petition. Defendants contend that the Federal Arbitration Act (9 U.S.C.S. § 1 et seq.) (FAA) preempts California law on the question of waiver, and submits that question to the arbitrator, not the court. Defendants further contend that even if California law applies, plaintiffs have failed to make a sufficient showing of waiver. We disagree and affirm.
I. FACTS
On January 6, 2010, plaintiffs Robert Genova and Matt Gray filed a complaint against defendants CSRware, Inc. and Karen Alondaro. Plaintiffs alleged that Alondaro, the owner of the company, had hired them as employees of the start up company: Genova as vice-president of engineering and Gray as a creative director. Plaintiffs alleged 10 causes of action, including failure to pay compensation, failure to furnish wage and hour statements, breach of contract, and fraud and misrepresentation. Plaintiffs demanded a jury trial.
Defendants apparently take the position that plaintiffs were hired as independent contractors, not employees. We express no opinion on this dispute, nor on the merits of plaintiffs' lawsuit.
On February 22, 2010, defendants answered the complaint. That same day, defendants propounded a request for production of documents, a notice of deposition, two sets of general interrogatories, and two sets of special interrogatories to each plaintiff. Plaintiffs also engaged in extensive discovery.
On May 26, 2010, plaintiffs filed a case management statement, which is not in the record. According to the register of actions, plaintiffs repeated their jury trial demand and estimated trial would last seven days.
On May 27, 2010, defendants, represented by attorney Thomas Makris, filed a case management statement. The statement indicated no trial date had been set, but that plaintiffs had requested a date in March 2011, "which is acceptable to defendants." The statement further indicated party/attorney unavailability in August and September 2010 and estimated trial would last five days.
Defendants' case management statement indicated they were willing to participate in mediation, but not arbitration. The statement also indicated defendants intended to file discovery motions, depose plaintiffs on September 1, 2010, and serve "[a]dditional interrogatories" and engage in "[p]ossible third party discovery" by the discovery cut off. Defendants also "anticipate[d] a motion to compel further responses to interrogatories and document requests."
Finally, defendants' case management statement indicated the parties had met and conferred and "have agreed to non-binding private mediation and to March 2011 for trial."
On June 1, 2010, the trial court notified the parties of a trial date of March 7, 2011, and set a mandatory settlement conference for February 16, 2011. On June 18, 2010, the court reset the trial date for March 28, 2011, and the settlement conference for March 11, 2011. On July 8, 2010, the court renoticed these dates due to a clerical error.
On December 15, 2010, attorney Makris withdrew as defendants' counsel.
On December 21, 2010, attorney Michael Hoffman filed a notice of association as defendants' counsel.
On December 23, 2010, attorney Hoffman filed a motion to compel arbitration and to stay the action, pursuant to the arbitration agreements in plaintiffs' offer letters. Hoffman supported the motion with his declaration setting forth numerous attempts at settlement and mediation. Hoffman also declared no parties had taken depositions or disclosed expert witnesses, and "none of the parties in the case have filed any motions on the merits or received any rulings on the merits of their respective claims and defenses."
On January 6, 2011, plaintiffs opposed the motion to compel arbitration, arguing, inter alia, that defendants had waived their right to compel arbitration. They noted that defendants had requested trial by jury, but not arbitration, in their case management statement. They also noted defendants, as well as plaintiffs, had engaged in substantial discovery.
In their reply brief in the trial court, defendants disputed plaintiffs' claim that their case management statement "requested trial by jury." In effect, it did. It noted plaintiffs' jury trial demand, agreed a March 2011 trial date would be acceptable to defendants, and estimated a five-day trial.
Neither party appeared at the hearing on the motion to compel arbitration. The trial court denied the motion to compel on the basis of waiver, finding that plaintiffs made a sufficient showing under the multi-factor waiver test set forth in St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187 (St. Agnes), "including prejudice to the plaintiff[s] due to the delay."
II. DISCUSSION
Defendants contend that the FAA preempts California law on the question of waiver, and submits that question to the arbitrator, not the court. They further contend—albeit briefly—that even if California law applies, plaintiffs have failed to make a sufficient showing of waiver. We reject their contentions for the following reasons.
Defendants correctly observe that the FAA submits the question of waiver to the arbitrator, while California arbitration law submits that question to the court. (See 6 Witkin, Cal. Procedure (5th ed. 2008) Proceedings Without Trial, § 545, p. 1036.) But they incorrectly argue the FAA preempts California arbitration law on the question of waiver.
Section 2 of the FAA provides: "A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (9 U.S.C.S. § 2.) This section "creates a body of federal substantive law, applicable in both federal and state courts, requiring that arbitration agreements be honored." (Sanders v. Kinko's, Inc. (2002) 99 Cal.App.4th 1106, 1111 (Sanders) [citing, inter alia, Perry v. Thomas (1987) 482 U.S. 483, 489 (Perry)].)
But cases have recognized the FAA applies only to state law principles applying solely to arbitration agreements, and does not apply to principles applicable to contracts generally, such as generally applicable contract defenses of fraud, duress, or unconscionability. (Sanders, supra, 99 Cal.App.4th at p. 1111; see Doctor's Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 687.) Notably, the United States Supreme Court has interpreted section 2 of the FAA as follows: "Thus state law . . . is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally." (Perry, supra, 482 U.S. at pp. 492-493, fn. 9, italics added.) This language has been quoted with approval by the California Supreme Court. (Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 164, overruled on unrelated grounds AT&T Mobility LLC v. Concepcion (2011) 563 U.S. ____, 131 S.Ct. 1740, 1746-1747.)
We conclude, then, because the issue of waiver of arbitration is essentially one of enforceability of an arbitration agreement, the FAA does not preempt California arbitration law regarding the determination of waiver. This conclusion is consistent with the general notion that FAA does not preempt state general contract law.
We turn now to California law, which provides that when a party petitions for arbitration under a valid arbitration agreement, the court shall order arbitration unless the petitioner has waived the right to compel arbitration. (Code Civ. Proc., § 1281.2, subd. (a); see St. Agnes, supra, 31 Cal.4th at pp. 1194-1195.)
No single test defines or describes the nature of the conduct that will constitute a waiver of arbitration. (St. Agnes, supra, 31 Cal.4th at pp. 1195-1196.) But most courts follow the following six-factor test: "In determining waiver, a court can consider '(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. . . .' " (Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, 992 (Sobremonte), quoting Peterson v. Shearson/American Exp., Inc. (10th Cir. 1988) 849 F.2d 464, 467-468.) The California Supreme Court has quoted and expressly approved the six-factor test as "relevant and properly considered in assessing waiver claims." (St. Agnes, supra, at p. 1196.)
While waiver should not be lightly inferred and the party seeking to establish it bears a heavy burden of proof, this burden controls the trial court's determination and not the standard of review. (Burton v. Cruise (2010) 190 Cal.App.4th 939, 945-946 (Burton).) The trial court's determination of waiver is a question of fact. The trial court's waiver finding, if supported by sufficient evidence, is binding on the appellate court. (St. Agnes, supra, 31 Cal.4th at p. 1196; see Burton, supra, at p. 946; see also Roberts v. El Cajon Motors, Inc. (Nov. 8, 2011) 200 Cal.App.4th 832 .)
Under the circumstances of this case, the multi-factor test essentially distills down to factual matters surrounding the questions of unreasonable delay and prejudice.
A party must demand arbitration within a reasonable time. (Wagner Construction Co. v. Pacific Mechanical Corp. (2007) 41 Cal.4th 19, 30.) What constitutes a reasonable time is a question of fact, " '[d]epending upon the situation of the parties, the nature of the transaction, and the facts of the particular case.' " (Ibid., quoting Sawday v. Vista Irrigation Dist. (1966) 64 Cal.2d 833, 836.) Courts are generally disinclined to allow a party to participate in litigation for a substantial amount of time and then request arbitration at the last minute or on the eve of trial. (See, e.g., Burton, supra, 190 Cal.App.4th at p. 945; Adolph v. Coastal Auto Sales, Inc. (2010) 184 Cal.App.4th 1443, 1452 (Adolph); Sobremonte, supra, 61 Cal.App.4th at pp. 996-997.)
Here, defendants actively participated in litigation for almost a year. While no depositions were taken or motions made directed to the merits, defendants participated in extensive discovery and allowed plaintiffs to do the same as plaintiffs strategically planned for and prepared for a jury trial. In their case management statement, defendants acceded to plaintiffs' jury trial demand and gave their own estimate of the time of trial. Then, as the clock was approaching midnight shortly before trial, defendants sought arbitration. "We are loathe to condone conduct by which a [litigant] repeatedly uses the court proceedings for its own purposes . . . all the while not breathing a word about the existence of an arbitration agreement, or a desire to pursue arbitration . . . ." (Adolph, supra, 184 Cal.App.4th at p. 1452.) Defendants did not give any satisfactory explanation for waiting to seek arbitration and litigating the case in court until a jury trial date was set. We conclude defendants delayed unreasonably before requesting arbitration.
The trial court's factual finding of prejudice is supported by substantial evidence. Prejudice need not be "actual" in the traditional sense. (See Burton, supra, 190 Cal.App.4th at p. 945.) "An egregious delay may result in prejudice." (Id. at p. 947.) Prejudice is typically found "where the petitioning party's conduct has substantially undermined [the] important public policy [in favor of arbitration] or substantially impaired the other side's ability to take advantage of the benefits and efficiencies of arbitration." (St. Agnes, supra, 31 Cal.4th at p. 1204; see Burton, supra, at p. 947.) The purpose of arbitration is to provide an expeditious, less expensive, less discovery-driven process. Prejudice can be shown by the impairment of the opponent's ability to take advantage of arbitration as a relatively speedy and inexpensive method of dispute resolution. (See St. Agnes, supra, 31 Cal.4th at p. 1204; see Burton, supra, at p. 948.)
Here again, defendants prejudiced plaintiffs by their unreasonable delay in requesting arbitration while actively participating in litigation. Despite the purported attempts at settlement and mediation, there was no request for arbitration and the settlement and mediation attempts were performed in the context of the lawsuit. Thus, plaintiffs were deprived of their right to a speedier, less expensive resolution of this dispute while being required to respond to numerous discovery requests, especially interrogatories and requests for document production.
Defendants rely on two cases that are distinguishable. In Zamora v. Lehman (2010) 186 Cal.App.4th 1 (Zamora), the reviewing court concluded that one of three defendants had not waived arbitration because he did not participate meaningfully in discovery, but chose primarily the avenue of settlement negotiations. (Zamora, supra, at pp. 19-20; see id. at pp. 8-9.) In Roman v. Superior Court (2009) 172 Cal.App.4th 1462 (Roman), the reviewing court emphasized that the petition to compel arbitration was filed only a little more than two months after the complaint, and no significant discovery responses had been served by either side. (Roman, supra, at pp. 1478-1479.) Here, of course, the delay was almost a year and plaintiffs had responded to discovery and were gearing up for a jury trial, only three months away.
Roman, supra, 172 Cal.App.4th at page 1479, also relied on Groom v. Health Net (2000) 82 Cal.App.4th 1189, a decision criticized in Burton. (Burton, supra, 190 Cal.App.4th at p. 948.)
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Moreover, any judge or lawyer involved in litigation understands that defendants' conduct left plaintiffs with an expectation that they would prepare the case for presentation to a jury and not an arbitrator, causing the preparation to be markedly different.
We conclude the trial court did not err in denying the petition to compel arbitration on the ground of waiver. As such, we need not reach the other issues raised by defendants.
III. DISPOSITION
The order denying the motion to compel arbitration is affirmed.
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Marchiano, P.J.
We concur: ____________
Margulies, J.
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Dondero, J.