Opinion
A100307.
7-15-2003
DOUGLAS PEARSON, Plaintiff and Respondent, v. ANDOR ELBERT, Defendant and Appellant.
Andor Elbert appeals from a judgment confirming an arbitration award. He contends that the arbitrator exceeded his jurisdiction by deciding issues that were not submitted to him. We affirm.
I. FACTUAL BACKGROUND
The factual findings of the arbitrator are binding on this court. (See Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 11, 832 P.2d 899.) We, therefore, draw our facts from the arbitrators findings and supplement them with evidence from the record as necessary for a full understanding of the case.
The parties met in mid-1991. Both were involved and experienced in the printing business. Elbert had formed his own printing company in 1975 and named it Olympian Graphics, Inc. (OGI). Douglas Pearson was working for Delta Lithograph Printing Company operating a print on demand (POD) system. The POD system utilized digital printing machines to print documents faster and at less cost than traditional offset printing. Elbert learned about the POD system from Pearson. They began negotiating an agreement to start a new company utilizing the POD system. In the interim, Pearson began working for OGI in July 1991.
In October 1991, Pearson entered into an agreement with OGI. The agreement provided that OGI would employ Pearson for three months for the purpose of implementing a POD system and in anticipation of the formation of a new entity, Olympian Communication Service, Inc., which would develop and provide the POD service. Elbert signed the agreement as president of OGI.
The agreement provided that immediately upon its execution, Elbert and/or OGI was to take all actions and steps necessary to form and capitalize the new corporation with Elbert or OGI to be issued 80 percent of the outstanding shares of stock of the corporation and the remaining 20 percent to be issued to Pearson. Section 4 of the agreement specifically addressed the failure to form the new corporation: "In the event that the Corporation contemplated under the terms of this Agreement is not formed within three (3) months of the execution of this Agreement and the Corporation does not employ Pearson for at least one year, unless Pearson is terminated for cause or non-performance, then Olympian agrees to pay Pearson a salary of $ 80,000.00, payable on a bi-weekly basis in the amount of $ 3,076.93, until Pearson has received a total salary of $ 80,000.00, from and after the commencement of his employment with Olympian. Upon payment of said sum, the terms of this Agreement shall be null and void and of no further force or effect." The agreement further provided that Pearson would serve as the corporations president for a period of three years, would devote fulltime effort to implement and develop the POD system and would receive $ 80,000 plus 3.5 percent of net sales as his annual compensation. Finally, the agreement contained an arbitration provision pertaining to "any controversy between the parties involving the construction or application of any of the terms, provisions, or conditions of this agreement . . . ."
The new corporation was not formed within three months of the execution of the agreement. Nonetheless, Pearson continued to work for OGI and built the foundation for an ongoing POD business. The arbitrator found that "during the first full year of Mr. Pearsons participation, print on demand sales quickly rose to exceed $ 1.0 million dollars. In addition, print on demand activity established a synergy with the offset printing operation, over time expanding offset sales as well. Due to the linkage between the two facets of the business, Mr. Elbert early in their relationship asked Mr. Pearson to assume sales manager duties for the business as a whole, not simply the print on demand aspect." Although Elbert did not form the new corporation during this period, he continued to pay Pearson salary and benefits as set forth in their agreement. Elbert, however, did not immediately pay Pearson any commissions. In late 1992, Elbert agreed to pay Pearson $ 60,000 in back commissions and to pay him future commissions pursuant to the agreement.
In late 1992, Pearson hired an attorney to prepare the documents for the new corporation. Olympian Communication, Inc., was thereafter incorporated. However, it was never capitalized. Although a bank account was opened for the corporation, no funds were deposited. Olympian Communication never became an operational company but was simply a corporate shell. The POD business was conducted through OGI.
In 1994, Elbert and Pearson began to have disagreements about the POD work. Unbeknownst to Pearson, Elbert was negotiating an agreement with Odin Corporation, a company whose business Pearson had recently acquired for OGI. The Odin Corporations work, which consisted of printing university class materials, primarily utilized the POD system. In October 1994, Elbert, on behalf of OGI, entered into a production and management agreement with Odin Corporation under which OGI would produce and sell the class materials, with royalties going to Odin. Elbert placed the revenues from the Odin account into OGI and did not allocate any of the funds to the POD operation. Pearson assumed that the revenue from the Odin work would be accounted for as POD revenue since it utilized the POD system.
In February 1995, Pearson told Elbert that he would quit if he was not paid his outstanding commissions. Elbert, in turn, offered to keep Pearson on as a salesperson at a reduced salary plus commissions. Pearson declined and left the company.
In December 1995, Pearson filed a complaint against Elbert, OGI, and Olympian Communication alleging breach of contract, fraud, and breach of the covenant of good faith and fair dealing. Elbert, in turn, filed a cross-complaint. In May 1996, the parties stipulated to submit their claims to binding arbitration. In June 1996, the court ordered the matter to arbitration pursuant to the terms of the September 1, 1991 agreement between the parties. In July 1997, while the matter was pending, Elbert sold OGI to Xyan Corporation for $ 3 million plus stock and contingent future revenue. On July 14, 1997, Elbert unilaterally dissolved Olympian Communication.
He subsequently amended his complaint in February 1996 to allege defamation and emotional distress claims.
In April 2001, Xyan and OGI, its subsidiary, petitioned for bankruptcy, resulting in an automatic stay of the arbitration as to OGI.
On February 15, 2002, the arbitrator heard Elberts motion for summary judgment or alternatively, summary adjudication. The arbitrator denied the motion as to the contract and fraud causes of action but granted summary adjudication on Pearsons claims for breach of the covenant of good faith and fair dealing, emotional distress, defamation and punitive damages for breach of contract.
The arbitrator bifurcated the hearing on the liability and damages claims. The hearing on Pearsons claims for liability was held in February and March 2002. The arbitrator found Elbert personally liable on Pearsons contract claims because Elbert had independent obligations and benefits under the contract including his duty to form and capitalize the new corporation, his joint responsibility with Pearson for employment and supervision of personnel and the potential for benefits as the majority shareholder. The arbitrator further found Elbert liable as the alter ego of OGI. He found that there was a sufficient unity of interest between Elbert and OGI in that they "were virtually interchangeable in employee perceptions of daily business operations." The arbitrator also noted that there was a potential for a significant inequitable result if alter ego liability did not attach. The arbitrator found that Elbert breached the agreement by failing to establish Olympian Communication as an operational company and by not paying Pearson the commissions he earned. The arbitrator denied Pearsons fraud claim and Elberts cross-complaint. The arbitrator determined that Pearson was the prevailing party and that Elbert was responsible for paying Pearsons reasonable attorney fees and costs.
On May 6, 2002, Elbert notified the arbitrator that he would not go forward with the damages phase of the arbitration but would file a motion to vacate the liability award on the ground that the arbitrator exceeded his jurisdiction. The trial court denied Elberts subsequent motion to vacate the award and his request to stay arbitration and ordered that Elbert appear for the damages phase of the proceeding.
The damages phase was held on June 3, 2002. Elbert did not personally appear for the hearing but was represented by counsel. The arbitrator awarded Pearson damages and interest for unpaid commissions in the amount of $ 417,881.03 and damages and interest for the value of his business interest in the POD operation in the sum of $ 1,484,255.20. In addition, the arbitrator awarded Pearson $ 290,047.50 in attorney fees and costs in the amount of $ 54,865.27.
In July 2002, Elbert filed a petition to vacate the arbitration award while Pearson filed a petition to confirm the arbitration award. The trial court denied the petition to vacate the award and granted the petition to confirm the award. The court thereafter entered a judgment confirming the arbitrators award.
II. DISCUSSION
A. Standard of Review
The scope of judicial review of arbitration awards is extremely narrow. (California Faculty Assn. v. Superior Court (1998) 63 Cal.App.4th 935, 943.) "Because the decision to arbitrate grievances evinces the parties intent to bypass the judicial system and thus avoid potential delays at the trial and appellate levels, arbitral finality is a core component of the parties agreement to submit to arbitration. Thus, an arbitration decision is final and conclusive because the parties have agreed that it be so." (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 10.) On appeal, we may not review the merits of the underlying controversy, the arbitrators reasoning or the sufficiency of the evidence supporting the award. (Id. at p. 11.) Further, absent limited exceptions, an arbitration award is not reviewable for errors of fact or law. (Ibid.) The Legislature has specifically set forth the exclusive grounds for challenging an arbitration award. (Id. at p. 32.) Code of Civil Procedure section 1286.2 permits the court to vacate an award that exceeds the arbitrators powers if it determines that the arbitrator exceeded his powers and the award cannot be corrected without affecting the merits of the decision. Section 1286.6 provides that the court may correct the arbitration award if it determines that the arbitrator exceeded his powers but the award may be corrected without affecting the merits of the decision.
All further statutory references are to the Code of Civil Procedure.
B. Scope of Arbitration
"The powers of an arbitrator derive from, and are limited by, the agreement to arbitrate." (Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 375, 885 P.2d 994.) An arbitrator does not exceed his powers within the meaning of sections 1286.2 and 1286.6 "merely by rendering an erroneous decision on a legal or factual issue, so long as the issue was within the scope of the controversy submitted to the arbitrators." (Moshonov v. Walsh (2000) 22 Cal.4th 771, 775, 996 P.2d 699.)
Here, the parties agreed to arbitrate any controversy involving the construction or application of any of the provisions of the agreement. In submitting their claims to the arbitrator, they agreed on the following statement of the issues: "Shall the claims presented in the first amended complaint of February 1996, and/or the cross-complaint of April 1996, be sustained; if so, what shall be the appropriate relief?" These claims included the entire matter concerning whether Elbert breached the agreement between the parties and, if so, the remedy for the breach. The scope of the arbitrators authority was not restricted by the agreement, the submission to arbitration or the rules of arbitration. Under these circumstances, the arbitrators award here was not in excess of his powers as derived from the parties agreement. As our Supreme Court has held, "in the absence of more specific restrictions in the arbitration agreement, the submission or the rules of arbitration, the remedy an arbitrator fashions does not exceed his or her powers if it bears a rational relationship to the underlying contract as interpreted, expressly or impliedly, by the arbitrator and to the breach of contract found, expressly or impliedly, by the arbitrator." (Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at p. 367.)
The agreements arbitration provision required that the controversy be submitted to arbitration in compliance with section 1280 et seq. The trial court retained jurisdiction for the limited purpose of ruling on discovery matters.
Elbert contends the arbitrator exceeded his jurisdiction by not enforcing the remedy for his failure to form the new corporation under the agreement. He argues that the arbitrator erroneously considered extrinsic evidence to modify the agreement.
Elberts arguments miss the mark. Elbert would have this court conclude that the contract was null and void under section 4 of the agreement because the new corporation was not formed within three months and because Pearson was paid an annual $ 80,000 salary. Elbert, however, ignores the arbitrators findings that Elbert breached several provisions of the contract and that the parties continued to rely on specific provisions of the agreement despite Elberts failure to form the new corporation in three months. Under the parties agreement and submission, the arbitrator had the power to interpret the contract and to make an award that was rationally related to the contract and the breach. "No exact correspondence is required between the rights and obligations of a party had the contract been performed and the remedy an arbitrator may provide for the other partys breach. . . . [P] . . . The rights and obligations of the parties under the contract as it was to be performed are not an unfailing guide to the remedies available when the contract has been breached." (Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at pp. 382, 383.)
Elberts claim that the arbitrator modified the parties agreement in making the award by considering extrinsic evidence of events occurring after the agreement was executed is, therefore, untenable. The arbitrator had the power to determine the appropriate remedy for Elberts breach of his obligations under the contract. The arbitrator found that Elbert breached several provisions of the agreement, including sections 4, 5, 7, and 8. The arbitrator had the authority to consider evidence regarding the parties performance of the contract, and nothing in the parties submission or agreement limited the arbitrators power to hear that evidence. The agreements integration clause did not preclude the arbitrator from interpreting the terms and provisions of the contract. Nor did the integration clause preclude the arbitrator from crafting a remedy to address Elberts breach of his obligations under the contract. An arbitrator has broad discretion to fashion a remedy. "Arbitrators are not obliged to read contracts literally, and an award may not be vacated merely because the court is unable to find the relief granted was authorized by a specific term of the contract. . . . [P] The award will be upheld so long as it was even arguably based on the contract . . . ." (Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at p. 381 .)
The agreement contained a standard integration clause.
Elbert also contends that the arbitration award must be vacated because the arbitrator decided issues of modification, estoppel and waiver, which the parties did not submit to him. This contention also lacks merit.
The arbitrator found that Elberts defenses to Pearsons breach of contract claims were waived and that he was estopped from relying on certain contract provisions because he never asserted that the agreement was null and void during the period he employed Pearson or that the agreement was terminated because Pearson failed to meet certain profit levels. The arbitrators findings were well within his authority to determine the controversy here. We discern no error.
C. Remedy
Finally, Elbert argues that the arbitrator exceeded his jurisdiction by failing to enforce the agreements specified remedy for the breach. Again, Elbert cites section 4 of the agreement and contends that the arbitrator was required to find that the contract was null and void because the new corporation was not formed within three months of the agreements execution. As Pearson points out, Elbert seeks to relitigate the issues that the arbitrator decided adversely against him. Elbert continues to contest the arbitrators findings that he breached the contract in numerous particulars and that, despite section 4 of the agreement, both parties continued to rely on the provisions of the agreement for several years. The agreement did not restrict the arbitrators power to determine an appropriate remedy for the breaches of contract found. Consequently, the arbitrator had the authority to make an award that was rationally related to the underlying agreement. (Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at p. 367.)
Elberts assertion that the arbitrator had no jurisdiction to award Pearson an ownership interest in the POD division of OGI is without merit. The arbitrators award was derived from sections 5 and 12 of the agreement, under which Pearson was entitled to a 20 percent share in the new corporation and under section 9, from which he had the right of first refusal to purchase Elberts share in the new entity prior to a sale to a third party. Specifically, the arbitrator found that Elbert breached these provisions and that Pearson was, therefore, entitled to be compensated for what should have been his share of the POD business. "Pearson provided a significant contribution to building the print on demand business that was a key foundation for the later success and sale of Olympian Graphics. As the print on demand operation developed and revenues grew, there also was a substantial decline, even a fiscal loss at times, in the contribution of the offset printing business that had largely been the domain of Mr. Elbert. On this record, it is found that the print on demand component was a primary element, and perhaps the dominant factor, in the valuation of Olympian Graphics at the time of its 1997 sale to Xyan." Thus, the arbitrators damages award, in compensating Pearson for his share of the POD business, was rationally related to the agreements terms and the breach. There is, thus, no basis to vacate the award. "The award will be upheld so long as it was even arguably based on the contract; it may be vacated only if the reviewing court is compelled to infer the award was based on an extrinsic source." (Advanced Micro Devices, Inc. v. Intel Corp. , supra, 9 Cal.4th at p. 381.)
For the same reasons, we must uphold the arbitrators award of commissions to Pearson. The award of commissions was premised on Pearsons rights under sections 8 and 12 of the agreement. Contrary to Elberts argument, under section 12, Pearson remained entitled to commissions owed him even if he was no longer an employee.
Alternatively, Elbert contends that if Pearson was entitled to the damage award, the arbitrators calculation was erroneous and must be corrected under section 1286.6.
Section 1286.6 provides that the court "shall correct the award and confirm it as corrected if the court determines that: [P] (a) There was an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award . . . ." Elbert argues that the award should have been based on the book value of the POD business as of February 1995 and not October 1997. The arbitrators award, however, was based on the evidence before him. We cannot "interfere with the award by examining the merits of the controversy, the sufficiency of the evidence supporting the award, or the reasoning supporting the decision. " (Severtson v. Williams Construction Co. (1985) 173 Cal. App. 3d 86, 93, 220 Cal. Rptr. 400, quoting Santa Clara-San Benito etc. Elec. Contractors Assn. v. Local Union No. 332 (1974) 40 Cal. App. 3d 431, 437, 114 Cal. Rptr. 909.) "The miscalculation, to be evident, must appear on the face of the award [citation] or be so readily apparent from the documentation in the case that explanation by proofs is not necessary." (Severtson v. Williams Construction Co., supra, 173 Cal. App. 3d at p. 94.) Here, there was no evident miscalculation of the award subject to correction under section 1286.6. Rather, the arbitrator based his award upon his interpretation of the contract and the evidence before him. There is simply no basis for us to correct the award.
D. Sanctions
Pursuant to rule 27(e) of the California Rules of Court, Pearson requests that we impose sanctions against Elbert for filing a frivolous appeal. An appeal is frivolous if the motive of the appellant is improper, or alternatively, if any reasonable attorney would agree that the appeal is totally and completely without merit. (In re Marriage of Flaherty (1982) 31 Cal.3d 637, 650-651, 183 Cal. Rptr. 508, 646 P.2d 179.) But an appeal is not considered frivolous where the issues presented are arguably correct, even if it is extremely unlikely that they will prevail on appeal. (Id. at p. 650.) Although we affirm the judgment below, we cannot conclude that the appeal was so lacking in merit as to warrant an award of sanctions, nor is there any evidence that the appeal was brought for an improper motive. We, therefore, deny Pearsons request for sanctions on appeal.
Elbert also requests sanctions. On April 17, 2003, this court issued an order requiring Pearson to file a corrected brief without change in the text but with all assertions of fact supported by citations to the record. Elbert contends that Pearson violated that order by filing an amended respondents brief that differed substantially from the brief originally filed. It included a new " Prefatory Statement, " deleted numerous factual statements, amended others and included numerous new statements. Elbert notes that there were more than 40 textual differences between the original and the amended respondents brief.
While we agree that Pearsons amended brief appears to be a violation of our order that the brief be corrected "as presently filed," there is room to interpret the changes to Pearsons brief as attempting to comply with that portion of the order requiring record support for every factual assertion. We, therefore, do not find that Pearson or his counsel have been guilty of an unreasonable infraction of the rules such as would merit sanctions. (Bryan v. Bank of America (2001) 86 Cal.App.4th 185, 194.) However, we would caution counsel in the future to adhere closely to the requirements of California Rules of Court, rule 15(a) in the preparation of appellate briefs. The failure to do so is not only vexing to opposing counsel but unnecessarily burdens the courts resources.
III. DISPOSITION
The judgment is affirmed. The parties are to bear their own costs on this appeal.
We concur: KAY, P.J., and SEPULVEDA, J.