Opinion
G056931
01-16-2020
ATG ELECTRONICS, INC., Plaintiff and Appellant; MORTEN & FAIRCHILD, PC, et al., Appellants, v. THE MULCAHY LAW FIRM, Defendant and Respondent.
Morten & Fairchild, Aaron B. Fairchild and Robert W. Miller for Plaintiff and Appellants. The Mulcahy Law Firm, James M. Mulcahy, Kevin A. Adams and Filemon Carrillo, Jr., for Defendant 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NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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. 30-2017-00906469) OPINION Appeal from a judgment of the Superior Court of Orange County, Thomas A. Delaney, Judge. Affirmed. Morten & Fairchild, Aaron B. Fairchild and Robert W. Miller for Plaintiff and Appellants. The Mulcahy Law Firm, James M. Mulcahy, Kevin A. Adams and Filemon Carrillo, Jr., for Defendant and Respondent.
* * *
This is an appeal by plaintiff and appellants, ATG Electronics, Inc., and their attorneys, Morten & Fairchild, PC, et al. (ATG), from a judgment following an arbitrator's decision awarding $50,000 in sanctions to defendant and respondent the Mulcahy Law Firm (Mulcahy or the law firm) pursuant to Code of Civil Procedure section 128.5. ATG does not contest the remainder of the award, but argues that the $50,000 in sanctions was improper because the arbitrator exceeded his powers in numerous respects. Mulcahy counters that the arbitrator did not exceed his authority and that any legal errors are unreviewable by this court. We conclude that the arbitrator did not exceed his powers, and that any errors were ordinary legal errors this court cannot review following an arbitration proceeding. Accordingly, we affirm the judgment.
Subsequent statutory references are to the Code of Civil Procedure unless otherwise indicated.
I
FACTS
In February 2015, ATG retained Mulcahy to represent it and certain individuals in a litigation matter. The parties entered into an engagement agreement outlining the scope of services. This agreement included an arbitration clause, which stated that any dispute over attorney fees would be arbitrated under the relevant provisions set forth in the Business and Professions Code, while any other disputes would be arbitrated under the Code of Civil Procedure. In January 2017, Mulcahy filed an arbitration demand with Judicial Arbitration and Mediation Service (JAMS) (the claim). The claim alleged Mulcahy had spent 440 hours on ATG's matter and that ATG had paid approximately $91,000 of the $187,000 outstanding in legal bills. Mulcahy brought claims for breach of contract, common counts and quantum meruit, seeking approximately $111,500 in fees and interest, costs, and "such other and further relief as the Court may deem just and proper," but did not specify attorney fees.
ATG filed a complaint against Mulcahy in Orange County Superior Court, alleging claims for fraudulent concealment, breach of fiduciary duty, restitution, and declaratory relief. ATG sought, among other remedies, compensatory and punitive damages, and attorney fees. Mulcahy filed a motion to compel arbitration, which the court eventually granted.
ATG filed a counterclaim and response to Mulcahy's claim, setting forth numerous affirmative defenses and alleging the same causes of action it had presented in its superior court complaint.
On July 25, 2017, Mulcahy filed a motion to dismiss the counterclaim with the arbitrator. Mulcahy characterized ATG's claims as "a disguised legal malpractice action based largely on fiction." Among other things, Mulcahy argued that all of ATG's claims except fraudulent concealment were time-barred by the one-year statute of limitations (§ 340.6), and ATG's claim for fraudulent concealment failed to meet the pleading standards for fraud.
On July 27, Mulcahy sent a letter to ATG's counsel, demanding ATG dismiss both the complaint (which was stayed in superior court) and the arbitration counterclaim. The letter stated that failure to comply would result in a motion for sanctions under sections 128.5 and 128.7, and a subsequent action for malicious prosecution. This letter set forth at some length Mulcahy's view of the deficiencies in the counterclaim.
ATG's counsel responded, stating, among other things, that "even where a defense of statute of limitations potentially applies, the burden is on the defending party to prove that defense." ATG denied that sanctions were warranted, and asserted that as a self-representing law firm, Mulcahy was "not incurring actual fees."
Mulcahy's motion to dismiss was fully briefed. The arbitrator issued a tentative decision stating that ATG's motion was procedurally proper, granting ATG's motion to dismiss in its entirety. The arbitrator denied a late request by Mulcahy to strike several of ATG's affirmative defenses, directing counsel to file a separate motion. Ultimately, the arbitrator reversed its tentative ruling on the fraudulent concealment cause of action and allowed it to proceed. The arbitrator also eventually denied Mulcahy's motion to strike ATG's affirmative defenses as improper under the relevant arbitration rules.
Subsequently, Mulcahy filed another motion seeking to dismiss the fraudulent concealment cause of action, the only operative part of ATG's counterclaim. ATG took Mulcahy's deposition, and according to ATG's counsel, the deposition led to the conclusion that insufficient evidence supported the intent prong of fraudulent concealment. ATG subsequently withdrew the counterclaim.
On the evening before the hearing on its motion was scheduled, Mulcahy filed a response to the withdrawal, requesting sanctions against ATG "in the amount of attorneys' fees that Mulcahy expended to put together the dispositive motion and defend the deposition." Mulcahy's request was ultimately denied.
After a four-day hearing, the arbitrator issued an interim award. As ATG concedes, "the arbitrator found in favor of [Mulcahy], and against ATG, on virtually every claim and defense raised in the parties' respective pleadings." The arbitrator did not soft-pedal his conclusions, finding that the case was "exactly" what ATG claimed it was not: a simple dispute about unpaid attorney fees. "ATG's affirmative defense of fraudulent concealment and the other issues raised during the arbitration hearing are nothing but 'red herrings' intended to avoid payment of the [Mulcahy's] legal fees." The arbitrator characterized Mulcahy's services as "exceptional, successful" and the fees as "reasonable and extremely necessary" and referred to ATG's actions as a "despicable effort to 'stiff'" Mulcahy. Further, the arbitrator stated ATG's claims that Mulcahy "acted unethically and in violation of the Rules of Professional Conduct are an insult" and claims of wrongdoing were nothing more than "a ruse."
Thus, while the arbitrator noted that a pro se attorney cannot recover attorney fees, fees and costs were recoverable under section 128.5. In addition to awarding Mulcahy $119,931.15 in damages, arbitration fees, and future interest, the arbitrator also awarded "[m]onetary sanctions, pursuant to [section] 128.5."
Mulcahy filed a motion for arbitration costs and monetary sanctions, seeking approximately $25,600 in arbitration fees and expenses and approximately $69,900 in sanctions. Without further briefing, the arbitrator subsequently issued a final award, which included an award of $119,926.47 in sanctions and made the entire award joint and several against ATG and its counsel. ATG contacted JAMS and raised the fact that it had not yet briefed the issue, and the arbitrator subsequently apologized and set a briefing schedule.
After briefing and a telephonic hearing, the arbitrator issued an amended final award (the amended award), granting Mulcahy the damages sought, future interest, and arbitration costs. The arbitrator also imposed $25,000 in sanctions on ATG for "'bad faith activities or tactics that are frivolous'" for filing the lawsuit in superior court and another $25,000 for asserting affirmative defenses and pursuing a counterclaim that were "unsupported by any evidence." The arbitrator also clarified that only the sanctions award was joint and several against ATG and its counsel.
Mulcahy petitioned to confirm the amended award, and ATG responded and requested the court correct it. The matters were fully briefed and a hearing was held. The court ultimately granted Mulcahy's petition to confirm the award, and entered judgment based on the amended award. ATG timely appealed.
II
DISCUSSION
A. California Arbitration Statutes and Standard of Review
"The California Arbitration Act (CAA; § 1280 et seq.) 'represents a comprehensive statutory scheme regulating private arbitration in this state.'" (Cooper v. Lavely & Singer Professional Corp. (2014) 230 Cal.App.4th 1, 10; see Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9 (Moncharsh).) Under the CAA, "[t]he scope of judicial review of arbitration awards is extremely narrow because of the strong public policy in favor of arbitration and according finality to arbitration awards. [Citations.] An arbitrator's decision generally is not reviewable for errors of fact or law." (Ahdout v. Hekmatjah (2013) 213 Cal.App.4th 21, 33; see Moncharsh, supra, 3 Cal.4th at p. 11.)
This principle was recently reaffirmed by the California Supreme Court in Heimlich v. Shivji (2019) 7 Cal.5th 350, 358. "A court's power to correct or vacate an erroneous arbitration award is closely circumscribed." (Id. at p. 367.) As the court explained: "Most legal errors in arbitration are not reviewable. [Citations.] An award may be vacated only for fraud, corruption, misconduct, an undisclosed conflict, or similar 'circumstances involving serious problems with the award itself, or with the fairness of the arbitration process.' [Citations.] Otherwise, judicial corrections are limited to remedying 'obvious and easily correctable mistake[s],' 'technical problem[s],' and actions in excess of authority so long as the correction leaves the merits of the decision unaffected. [Citation.] '[B]y voluntarily submitting to arbitration, the parties have agreed to bear the risk [of uncorrectable legal or factual error] in return for a quick, inexpensive, and conclusive resolution to their dispute.'" (Ibid.)
Accordingly, judicial review of an arbitration award is ordinarily limited to the statutory grounds for vacating an award under section 1286.2 or correcting an award under section 1286.6. (Moncharsh, supra, 3 Cal.4th at pp. 12-13; Sunline Transit Agency v. Amalgamated Transit Union, Local 1277 (2010) 189 Cal.App.4th 292, 302-303.) One of the grounds set forth in section 1286.2 is an arbitrator exceeding his or her authority, and that is ATG's principal complaint here. (§ 1286.2, subd. (a)(4).) ATG also argues awarding sanctions was against public policy.
As for the relevant standard of review, "[t]o the extent the trial court made findings of fact in confirming the award, we affirm the findings if they are supported by substantial evidence. [Citation.] To the extent the trial court resolved questions of law on undisputed facts, we review the trial court's rulings de novo. [Citation.] [¶] We apply a highly deferential standard of review to the award itself, insofar as our inquiry encompasses the arbitrator's resolution of questions of law or fact. Because the finality of arbitration awards is rooted in the parties' agreement to bypass the judicial system, ordinarily '"[t]he merits of the controversy between the parties are not subject to judicial review."'" (Cooper v. Lavely & Singer Professional Corp., supra, 230 Cal.App.4th at pp. 11-12.) B. Request for Judicial Notice
Without objection, ATG's and their attorneys' request for judicial notice is granted pursuant to Evidence Code sections 451, 452 and 459. C. Excess of Authority
ATG offers several arguments asserting the arbitrator exceeded his authority: by issuing an award that violated public policy, by deciding an issue not properly submitted to arbitration, by acting outside the scope of the parties' engagement agreement by awarding a remedy that was not authorized by law. All of these are valid grounds for vacating (or correcting) an arbitration award under section 1286.2. (Shahinian v. Cedars-Sinai Medical Center (2011) 194 Cal.App.4th 987, 999-1000 (Shahinian).)
1. Public Policy
While an arbitration award can be vacated if it violates public policy, the California Supreme Court has cautioned a court should be reluctant to overturn an arbitrator's award without "an explicit legislative expression of public policy" (Moncharsh, supra, 3 Cal.4th at p. 32) or, as the Court of Appeal has stated, a "well-defined public policy." (Department of Personnel Administration v. California Correctional Peace Officers Assn. (2007) 152 Cal.App.4th 1193, 1195.) Courts may only apply this doctrine in "limited and exceptional circumstance[s]." (Jordan v. California Department of Motor Vehicles (2002) 100 Cal.App.4th 431, 438.) "This exception is applicable only when there has been '"a clear expression of illegality or public policy"' that undermines the presumption in favor of private arbitration." (Ahdout v. Hekmatjah, supra, 213 Cal.App.4th at p. 38.)
Such relatively rare examples include arbitration decisions that violated the state constitution's prohibition on gifts of public funds (Jordan v. California Dept. of Motor Vehicles, supra, 100 Cal.App.4th at p. 452), required a party to violate an existing court-ordered injunction (City of Palo Alto v. Service Employees Internat. Union (1999) 77 Cal.App.4th 327, 339-340), disregarded the disgorgement provisions of California's contractor licensing law (Ahdout v. Hekmatjah, supra, 213 Cal.App.4th at p. 38), permitted an unlicensed realtor to recover (All Points Traders, Inc. v. Barrington Associates (1989) 211 Cal.App.3d 723, 726-727), and enforced an illegal contract (Loving & Evans v. Blick (1949) 33 Cal.2d 603, 612-613). All of these cases involve significant public interests or consumer protections.
ATG claims this case warrants invoking this rare exception to the rule of arbitral finality and prohibition of judicial review because the arbitrator's decision purportedly violated the procedural protections of section 128.5. The policies at play here are not about the public interest or consumer protection, but technical matters relevant to attorneys, and to a lesser extent, their clients. The court in Moncharsh rejected the contention that a fee-splitting provision in the pertinent contract violated public policy to the extent that judicial review of the award was appropriate. (Moncharsh, supra, 3 Cal.4th at pp. 31-33.) "We perceive, however, nothing in the Rules of Professional Conduct at issue in this case that suggests resolution by an arbitrator of what is essentially an ordinary fee dispute would be inappropriate or would improperly protect the public interest. Accordingly, judicial review of the arbitrator's decision is unavailable." (Id. at pp. 32-33.)
This, too, is an "ordinary fee dispute," regardless of the procedural differences, and no overarching public policy requires an exception to the general rule of arbitral finality. Indeed, the far more important public policy provisions in section 128.5 are the substantive provisions adopted to discourage frivolous litigation and dilatory tactics - a finding that ATG does not bother to dispute here.
Even if the arbitrator incorrectly applied section 128.5, "'in either determining the appropriate law or applying it,'" the parties may obtain court review of the merits "only if the arbitration agreement expressly provided that the arbitrator's errors of law were reviewable in court." (Baize v. Eastridge Companies, LLC (2006) 142 Cal.App.4th 293, 301, fn. omitted.) The engagement agreement includes no such provision. Any claim that enforcing section 128.5 in an arbitral forum violates due process is without merit. As courts have found repeatedly, due process requires a state actor, not a private forum agreed to by the parties. (See, e.g., Shahinian, supra, 194 Cal.App.4th at p. 1008 [constitutional limitations on punitive damage awards do not apply to private arbitration].) Simply put, there are no grounds to find a violation of public policy that would require vacating the arbitrator's decision.
Even if due process were required, ATG received the fundamental hallmarks of due process - notice and an opportunity to be heard. Requiring the full procedures of section 128.5 would have been pointless in this setting. The specific reasons ATG was sanctioned - filing the complaint in civil court and advancing unmeritorious claims and defenses during the arbitration - were water long under the bridge by the time the sanctions motion was heard.
2. Issue Submitted to Arbitration
ATG first argues the issue of sanctions was not properly submitted to arbitration. ATG admits this is generally a question of what the parties have included in their prayer for relief, citing Moshonov v. Walsh (2000) 22 Cal.4th 771, 776. ATG then switches, however, to a discussion of whether the engagement agreement permitted such an award (and we will discuss that issue in a moment).
Mulcahy's prayer for relief in its arbitration demand included "cost of suit incurred" and "other and further relief as the Court may deem just and proper." This sufficiently encompasses procedural relief such as sanctions. Indeed, it is impossible to envision how sanctions for conduct during arbitration could ever be awarded if the parties were required to include such a request in their initial claim.
3. Scope of the Parties' Agreement to Arbitrate
ATG next argues the arbitrator exceeded his powers by fashioning an award outside the scope of the engagement agreement. "Code of Civil Procedure section 1283.47 provides the arbitrator's written award shall determine all submitted questions 'necessary in order to determine the controversy.'" (Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 372, fn. omitted (Advanced Micro Devices).) "[I]t is for the arbitrators to determine what issues are 'necessary' to the ultimate decision. . . . 'Likewise, any doubts as to the meaning or extent of an arbitration agreement are for the arbitrators and not the court to resolve.'" (Ibid.)
"Arbitrators . . . have wide discretion . . . to fashion a just remedy . . . as long as the remedy is rationally related to the contract and the breach." (Swan Magnetics, Inc. v. Superior Court (1997) 56 Cal.App.4th 1504, 1511.) "Were courts to reevaluate independently the merits of a particular remedy, the parties' contractual expectation of a decision according to the arbitrator['s] best judgment would be defeated." (Advanced Micro Devices, supra, 9 Cal.4th at p. 375.) "[I]n 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." (Id. at p. 367.)
ATG argues that because the engagement agreement did not include an attorney fees provision, an award of sanctions under section 128.5 was therefore outside the scope of the agreement. We disagree. The parties engagement agreement that "[a]ny disagreement will be submitted" to arbitration for "a final and binding decision about the outcome of the dispute." The arbitrator was authorized to hear "any dispute which cannot be resolved amicably." This broad ambit includes litigation conduct that may be subject to sanctions. "Absent an express and unambiguous limitation in the contract or the submission to arbitration, an arbitrator has the authority to find the facts, interpret the contract, and award any relief rationally related to his or her factual findings and contractual interpretation." (Gueyffier v. Ann Summers, Ltd. (2008) 43 Cal.4th 1179, 1182.)
"While the agreement does not explicitly address jurisdiction over ancillary matters . . . , neither does it exclude them from consideration. 'Absent an express and unambiguous limitation in the contract or the submission to arbitration, an arbitrator has the authority to find the facts, interpret the contract, and award any relief rationally related to his or her factual findings and contractual interpretation.'" (Heimlich v. Shivji, supra, 7 Cal.5th at p. 358.) Procedural matters such as litigation conduct are rationally related to the underlying dispute.
4. Remedy Authorized by Law
ATG's next argument is related to its others on the issue of the arbitrator's powers. Specifically, ATG claims the award of sanctions was not authorized by law because self-represented attorneys are not entitled to attorney fees, either by direct award or through a sanctions award. (Musaelian v. Adams, supra, 45 Cal.4th at p. 519.) ATG quotes the language from two separate sections of the award to demonstrate that the sanctions award was intended as an attorney fees award to Mulcahy, asking us to read the two sections as if they are one.
The arbitrator unquestionably cited outdated law on this point, referring to Abandonato v. Coldren (1995) 41 Cal.App.4th 264, a case that was expressly overturned by Musaelian v. Adams (2009) 45 Cal.4th 512, for the proposition that self-representing attorneys could recover attorney fees under section 128.5.
The part of the award granting sanctions states that the arbitrator was awarding "[m]onetary sanctions, pursuant to . . . [s]ection 128.5, for 'bad faith activities or tactics that are frivolous . . .'" both for filing the superior court lawsuit and for asserting affirmative defenses and a counterclaim "unsupported by any evidence." Mulchay is asking that we find there is no substantial evidence the sanctions were awarded as sanctions, not as attorney fees, but we cannot reach this conclusion from either the award or any other documents in the record.
Among other things, had the arbitrator intended the award to compensate Mulcahy for attorney fees, the amount awarded was substantially less than the amount Mulcahy proposed as compensation for its expenses (approximately $70,000) or the value of what it would have charged another client for the same work (approximately $182,000). The arbitrator's decision to divide the sanctions into two $25,000 awards is another fact that does not support ATG's conclusion that the sanctions were intended as attorney fees. Nor do we have the authority to review the amounts to determine their fairness or rationality. Nor can we review the reasoning by which the arbitrator reached his conclusions. (Moncharsh, supra, 3 Cal.4th at p. 11.)
Further, parties to private arbitrations "have bargained for an arbitrator to exercise his or her 'flexibility, creativity, and sense of fairness' in selecting a particular remedy. [Citation.] 'Were courts to reevaluate independently the merits of a particular remedy, the parties' contractual expectations . . . would be defeated.' [Citation.] Accordingly, an arbitrator generally 'does not exceed his or her powers' when imposing a particular remedy if the remedy 'bears a rational relationship' to the underlying claim or breach, even if the remedy could not have been awarded by a jury or court." (Emerald Aero, LLC v. Kaplan (2017) 9 Cal.App.5th 1125, 1139, italics added.)
The relatively rare cases where an arbitrator has been found to have acted in excess of his or her powers by awarding a remedy not authorized by law typically involve cases where the remedy was expressly inconsistent with the relevant contract or California law. In O'Flaherty v. Belgum (2004) 115 Cal.App.4th 1044, 1060-1061, for example, the arbitrator ordered a forfeiture of certain assets which was prohibited by the terms of the underlying agreement and California law. The arbitrator "in effect awarded 'a remedy expressly forbidden by the arbitration agreement,'" acting "in excess of his power and jurisdiction." (Id.at p. 1061.) But nothing in the engagement agreement between ATG and Mulcahy indicates an intent to limit the arbitrator's discretion to fashion remedies. (Advanced Micro Devices, supra, 9 Cal.4th at pp. 383-384.)
In most cases, courts have found arbitrators to have acted within their powers, even if the ruling would be erroneous if it had been entered by a court of law. (Moore v. First Bank of San Luis Obispo (2000) 22 Cal.4th 782.) In Moore, the arbitrator failed to award attorney fees despite a mandatory attorney fees provision in the contract. (Id. at p. 784.) "That failure amounted at most to an error of law on a submitted issue, which does not exceed the arbitrators' powers under the holding of Moncharsh, supra, 3 Cal.4th at page 28." (Id. at p. 788.)
Accordingly, even if the arbitrator did intend the sanctions as an award of attorney fees, as ATG contends, it would be an ordinary, unreviewable legal error. In Shahinian, supra, 194 Cal.App.4th at page 1006, the defendant asked the court to find the arbitrator exceeded her powers by awarding punitive damages of a '[c]onstitutionally excessive' amount that would never be allowed in court." The court concluded "the agreement gave the arbitrator broad authority to grant remedies available in court, and made no reference to punitive damages or to any limitation on the amount of such an award. If the punitive damages award was excessive, the arbitrator's error would be no different from other errors of law, which are generally not reviewable 'whether or not such error appears on the face of the award and causes substantial injustice to the parties.'" (Ibid.) D. Merits of the Issue Submitted
In a four-sentence argument at the end of its opening brief, ATG argues that "[t]he Award, in substance, amounts to an allocation of purported attorney fees to [Mulcahy]. As an item of costs, it therefore does not go to the merits . . . ." Therefore, ATG claims, the award may be corrected under section 1286.6, subdivision (b). As we have already explained, we find no error in imposing the sanctions, and therefore need not reach this issue.
III
DISPOSITION
The judgment is affirmed. Mulcahy is entitled to its costs on appeal.
MOORE, J. WE CONCUR: BEDSWORTH, ACTING P. J. ARONSON, J.