Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County, No. SC097574 Gerald Rosenberg, Judge.
Sun & Kopicka and Josef L. Kopicka for Defendants and Appellants.
Lurie & Park, Barak Lurie and Michele A. Reikes for Plaintiffs and Respondents.
WILLHITE, J.
INTRODUCTION
Defendants Michael Keehan, Lucy Keehan, Lucy’s Silk Store, Inc. and Michael’s Imports, Inc. (collectively defendants) appeal from a judgment entered after the trial court denied their motion to vacate an arbitration award against them and instead confirmed the award. Defendants contend that the arbitrator failed to decide their counter-claim for misappropriation of trade secrets and thus the trial court should have vacated the arbitration award for failure to resolve all issues submitted to arbitration. We agree that California law compels this result, and, accordingly, reverse the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
The Parties’ Agreements
In March 2007, Ira Rad, on behalf of his company Bita LLC, executed an agreement (Sales Agreement) with one of defendants’ corporations, Michael Imports, Inc., to sell and distribute silk products from defendants’ “Lucy’s Silk” label. Bita paid defendants $60,000 as partial consideration for the exclusive right to sell the products in the eastern United States. However, after the Sales Agreement was signed, defendants continued to sell the products directly to East Coast customers, undercutting Bita’s sales.
“We therefore take the arbitrator’s findings as correct without examining a record of the arbitration hearings themselves.” (Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 367, fn. 1 (Advanced Micro).)
In July 2007, Michael Keehan represented to Rad and his wife Heidi Novian that defendants had a “great offer” to sell them 49 percent of the shares in Lucy’s Silk Store, Inc. The parties ultimately executed a Stock Purchase Agreement and, in partial consideration for the shares, Rad and Novian paid defendants $40,000. However, defendants never issued stock shares to Rad and Novian, and they also failed to disclose financial information regarding the corporation as federal securities regulations required.
Pre-Arbitration Proceedings in Superior Court
Rad, Novian, Bita LLC and Bita Collection, LLC (collectively plaintiffs) sued defendants, alleging causes of action for breach of contract, fraud, negligent misrepresentation, and rescission with respect to the Sales Agreement, and the same four causes of action with respect to the Stock Purchase Agreement. Plaintiffs also alleged a cause of action for elder financial abuse and common counts for open book account, for money had and received, for money lent, and for money paid.
Defendants petitioned for an order compelling arbitration based on a provision of the Stock Purchase Agreement providing that any disputes relating to that agreement would be submitted to mediation, and if the matter were not resolved through mediation, it would be submitted to binding arbitration. The parties ultimately stipulated to submit their disputes to binding arbitration and a stay of the litigation was entered.
Defendants subsequently filed a cross-complaint for damages against plaintiffs alleging three causes of action for breach of contract, misappropriation of trade secrets, and fraud. They contended that plaintiffs had breached the Stock Purchase Agreement by failing to pay an additional $100,000 allegedly owed under the terms of the contract. Their claim for misappropriation of trade secrets alleged that, based on plaintiffs’ assurances that they would make the payments required by the Stock Purchase Agreement, plaintiffs had been given access to defendants’ customer list compiled over ten years and containing detailed and valuable customer preference information. The complaint alleged that defendants had suffered damages by plaintiffs’ use of the proprietary customer list.
Arbitration
After a three-day hearing, the designated arbitrator issued a “Binding Arbitration Award” (Award) that included detailed findings. The arbitrator noted he had considered the pre- and post-arbitration briefs submitted by the parties, the oral testimony presented, and all the documents received into evidence during the arbitration.
1. Findings on Plaintiffs’ Claims
In the Award, the arbitrator concluded that defendants breached the Sales Agreement by continuing to sell to East Coast customers despite plaintiffs’ exclusive right under the Sales Agreement to sell defendants’ products in that region. The arbitrator sided with plaintiffs on their claim for rescission of the Stock Purchase Agreement, deeming the agreement unenforceable because defendants never provided plaintiffs with the financial information legally required to be disclosed. The Award further determined that defendants engaged in fraudulent misrepresentations in connection with both the Sales Agreement and the Stock Purchase Agreement. However, it stated that the elements of the financial elder abuse claim were not satisfied, and that a discussion of the causes of action for conspiracy, negligent misrepresentation and common counts was not necessary.
The Award provided for consequential damages for the breach of contract in the amount of $135,000 and punitive damages on the fraud claim in the amount of $270,000. The arbitrator later amended the Award to provide attorney fees and costs to plaintiffs in the amount of $79,703.95.
The Award also concluded that defendants fraudulently conveyed their home to their son to prevent plaintiffs from collecting on a judgment, and found plaintiffs are entitled to provisional remedies in accordance with Code of Civil Procedure section 1281.8 in order to protect their right to recover on the Award.
Statutory references are to the Code of Civil Procedure.
2. Findings on Defendants’ Cross-Claims
In a section entitled “Brief Summary, ” the Award states: “In this litigation Respondents asserted Cross-Complaints for two causes of action; (1) breach of contract, and (2) fraud.” In a section entitled “My Discussion of This Arbitration and My Findings, ” the Award states: “The Respondent’s Cross Actions for Breach of Contract: I find that the Respondents have not met their burden of proof to establish their Breach of Contract cause of action.” Nowhere does the Award mention the second cause of action for misappropriation of trade secrets alleged in defendants’ cross-complaint, despite the fact that defendants’ arbitration brief and post-arbitration brief each referenced this particular cross-claim. Plaintiffs concede in their brief that defendants presented evidence in support of the misappropriation claim at the arbitration hearing, including testimony from two witnesses.
Post-Arbitration Proceedings in Superior Court
Plaintiffs filed a petition in superior court seeking confirmation of the Award, while defendants moved to vacate it in part on the ground that the arbitrator had failed to adjudicate the misappropriation of trade secrets claim. The trial court granted the petition to confirm the Award and denied the motion to vacate it. In response to defendants’ argument that the arbitrator had failed to address their cross-claim for misappropriation of trade secrets, the court noted at the hearing that “this arbitrator was empowered to rule [and t]here’s nothing in the record that indicates that he did not rule.” The trial court entered judgment in plaintiffs’ favor, finding that the arbitrator had awarded them damages on their claims and “ruled against Defendants on each of their counter claims.”
Defendants also contended that (1) the arbitrator had exceeded his authority by considering plaintiffs’ fraudulent conveyance claim; and (2) the arbitrator was biased, but they do not press either argument on appeal.
This timely appeal followed.
DISCUSSION
Standard of Review
We review de novo the trial court’s order denying the motion to vacate the Award. (Advanced Micro, supra, 9 Cal.4th at p. 376, fn. 9; Alexander v. Blue Cross of California (2001) 88 Cal.App.4th 1082, 1087.) However, “[t]o ensure that an arbitrator’s decision is the end of the dispute, arbitration awards are subject to very narrow judicial review.” (A.M. Classic Construction, Inc. v. Tri-Build Development Co. (1999) 70 Cal.App.4th 1470, 1474-1475 (A.M. Classic).) “[A]s a general rule, courts will indulge every reasonable intendment to give effect to arbitration proceedings. [Citations.]” (Id. at p. 1474.)
Arbitrator’s Duty to Determine All Necessary Issues
Defendants contend that the trial court should have vacated the Award because it did not resolve one of the claims submitted to the arbitrator, namely defendants’ cross-claim for misappropriation of trade secrets.
The California Arbitration Act sets forth narrow grounds for vacating an arbitration award. (§ 1286.2, subd. (a)(1)-(6); Mossman v. City of Oakdale (2009) 170 Cal.App.4th 83, 88 (Mossman).) Among these grounds, an award may be vacated where a party’s rights “were substantially prejudiced by... conduct of the arbitrators contrary to the provisions of this title.” (§ 1286.2, subd. (a)(5); see Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 12-13 (Moncharsh).) One of “the provisions of this title” is section 1283.4, which states that the arbitration award “shall include a determination of all the questions submitted to the arbitrators the decision of which is necessary in order to determine the controversy.” (§ 1283.4; see A.M. Classic, supra, 70 Cal.App.4th at p. 1475.) Thus, the “failure to decide an issue submitted to an arbitrator provides a valid ground for vacating the award.” (Mossman, supra, 170 Cal.App.4th at p. 88; see Jones v. Kvistad (1971) 19 Cal.App.3d 836, 841.) As this court has previously concluded, long-standing precedent holds that “‘where parties refer all their differences to arbitration, it is the duty of the arbitrators to pass upon the whole subject in controversy, and if it appears upon the face of the award that they have not disposed of the whole matter but have left a part open... it is void and will be set aside.’” (Elliott & Ten Eyck Partnership v. City of Long Beach (1997) 57 Cal.App.4th 495, 502-503 (Elliott), quoting Porter v. Scott (1857) 7 Cal. 312, 316; see also Safeway Stores, Inc. v. Brotherhood of Teamsters (1978) 83 Cal.App.3d 430, 440-442; Banks v. Milwaukee Ins. Co. (1966) 247 Cal.App.2d 34, 38-39.)
Plaintiffs correctly point out that an arbitrator is not required to make express findings on each issue. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 107; Sapp v. Barenfeld (1949) 34 Cal.2d 515, 522 (Sapp) [“The failure to make an express finding in the award on [a] claim does not invalidate the award. ‘There is no general rule that arbitrators must find facts and give reasons for their awards. In fact, the rule and general practice is to the contrary.’ [Citations.]”].) Arbitrators “‘may... impliedly reject a claim that a party might successfully have asserted in a judicial action.’ [Citations.]” (Moncharsh, supra, 3 Cal.4th at pp. 10-11.) However, the arbitrator’s award must “serve[] to settle the entire controversy.” (Sapp, supra, 34 Cal.2d at p. 523.)
While courts may generally “presume[] that all issues submitted for decision have been passed on and resolved, and the burden of proving otherwise is upon the party challenging the award” (Rodrigues v. Keller (1980) 113 Cal.App.3d 838, 842 (Rodrigues)), the express language of the Award here renders it impossible to presume that the arbitrator impliedly rejected defendants’ counter-claim for misappropriation of trade secrets. The Award erroneously stated that defendants asserted only two cross-claims, for breach of contract and fraud, while omitting altogether any reference to defendants’ cross-claim for misappropriation of trade secrets, even though it is undisputed that this claim was submitted to the arbitrator. The Award then concluded only that defendants had “not met their burden of proof to establish their Breach of Contract cause of action, ” and issued no further findings with respect to defendants’ cross-claims. The Award’s explicit reference to only two cross-claims suggests that the arbitrator simply overlooked the third claim for misappropriation of trade secrets.
In addition, the findings stated in the Award do not permit the inference that the arbitrator passed on the claim. The Award expressly rejects only defendants’ cross-claim for breach of the Stock Purchase Agreement. Although it can fairly be presumed that the arbitrator deemed defendants’ fraud claim relating to the Stock Purchase Agreement invalid given his rejection of their breach of contract claim, the misappropriation claim alleged a distinct controversy arising out of plaintiffs’ alleged use of defendants’ proprietary customer list. The fact that the arbitrator found defendants liable for breach of contract and fraud does not resolve the separate question of whether they suffered harm from plaintiffs’ alleged use of this information. None of the arbitrator’s findings bear on this issue. Because the Award does not resolve this controversy, it is incomplete.
Because it is beyond our purview to consider the merits of the claims submitted to the arbitrator (Moncharsh, supra, 3 Cal.4th at p. 11), we must assume for purposes of this appeal that defendants’ cross-claim for misappropriation of trade secrets is a meritorious one. As such, we have no choice but to assume that defendants were prejudiced by the arbitrator’s failure to consider it. (See Rosenquist v. Haralambides (1987) 192 Cal.App.3d 62, 69 [prejudice must be shown in order to vacate award under § 1286.2].) Unfortunately, in these circumstances, the only available remedy for the arbitrator’s failure to consider all the claims submitted for his determination is to vacate the Award and order an arbitration rehearing. (Elliott, supra, 57 Cal.App.4th at pp. 502-503; § 1287; but see Rodrigues, supra, 113 Cal.App.3d at p. 842 [questioning whether legislature intended to require awards to be vacated in their entirety “where the omitted issue is severable in such a way that partial remand would not prejudice the legitimate interests of any party”].)
DISPOSITION
The judgment is reversed. The matter is remanded to the trial court which is directed to vacate the arbitrator’s award and to proceed in accordance with section 1287. Appellants shall recover costs on appeal.
We concur: EPSTEIN, P. J., SUZUKAWA, J.