Cal Biz Lit

So What the Heck is Happening With Contractual Arbitration in California?

CBL is not just about Proposition 65 – it just sometimes seems that way.  But the goal here is to provide out-of-state lawyers, general counsel, and other interested parties with some useful information about cutting edge issues facing litigants here in the Golden State.  And today, we’re talking about the seemingly never-ending battle about contractual arbitration. There is a lot going on, resulting, no doubt, in an overly long post.  Here goes.

OK, so if you haven’t been sleeping under a rock the past three years, you know this:  In 2011, SCOTUS decided AT & T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).  Up until then, California Courts followed the “Discover Bank rule” (Discover Bank v. Superior Court (2005) 36 Cal.4th 148) to rule that in consumer contracts with binding arbitration clauses and class action waivers, the class action waiver rendered the arbitration clause unconscionable and therefore unenforceable.  But in Concepcion, SCOTUS invalidated Discover Bank, ruling that it conflicted with the Federal Arbitration Act (“FAA”), 9 U.S.C. § 2.  More broadly, SCOTUS noted:

[The FAA] permits arbitration agreements to be declared unenforceable "upon such grounds as exist at law or in equity for the revocation of any contract." This saving clause permits agreements to arbitrate to be invalidated by "generally applicable contract defenses, such as fraud, duress, or unconscionability," but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. 

Since Concepcion was decided, there have been scores of arbitration decisions coming out of the California Courts of Appeal, and three subject to review by Cal Supremes.  Two of the three Cal Supremes cases have been decided, as follows:

Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4th 659 (“Sonic I”) and Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109 (“Sonic II”) arrived on the scene, respectively, before and after Concepcion.  In Sonic I, before Concepcion, the Cal Supremes considered an employee/employer contract that (a) had binding arbitration provision and (b) waived the right to a “Berman hearing,” a California administrative hearing mechanism for wage claims.  The Cal Supremes held that the waiver of the Berman hearing was unconscionable, that the employee had a right to the hearing, but that if the arbitration provision was valid, arbitration would supplant the post-Berman court processes.

More after the jump.

Waiting For Insurance Coverage For Your Proposition 65 Case? Not Such A Good Idea

 Update:  The case discussed here has now been certified for publication.  Which means it's citeable for the proposition that liability insurance policies don't cover Proposition 65 matters.  Cal Biz Lit hardly ever reports on unpublished appellate decisions.  Citing them in court is verboten, so I generally figure that discussing them here just confuses things. 

But there are always exceptions, and hey, it’s my law blog, so I guess I can decide when an exception applies.  All of which brings us to Ulta Salon Cosmetics Fragrance Inc. v. Travelers Property Casualty Insurance Company of America  (June 10, 2011), Link provided to Google Scholar – see those great big bold letters that say “NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS” ?  This means you!)

The case stands for a really simple proposition:  A commercial general liability policy neither affords coverage nor provides a defense duty for a claim under Proposition 65.  This is because there is no allegation of bodily injury or property damage. Although we’ve heard an occasional rumor about some insurance company agreeing to defend a Proposition 65 enforcement matter, we’ve never seen one do it. 

But Ulta Salon, and the two other cases we discuss today, offer important cautionary tales for companies sued in Proposition 65 cases.  To learn today’s moral, you’ll have to stick around to the end of the post.

We are aware of two previous published cases relevant to insurance coverage and Proposition 65 cases. Oddly enough, neither are California cases and both are from Illinois.  In Crawford Laboratories, Inc. v. St. Paul Insurance Company of Illinois (1999) 715 N.E. 2^nd 653, the Illinois based plaintiff fell into the clutches of a California bounty hunter was sued by a private party enforcer under Proposition 65.  It sued its insurer seeking a declaration that it was entitled to a defense.  The Illinois Court said nix, based on the same grounds recently cited in the unpublished Ulta Salon opinion:  no bodily injury, so no duty to defend.  Four years later, the same court decided HPF, L.L.C. v. General Star Indemnity (2003) 788 N.E.2d 753.  The insured there had been sued under the old version of California’s Unfair Competition Law, which in the bad old days allowed plaintiffs to sue in the alleged public interest without showing they had been injured (or, for that matter, that they ever had anything to do with the business they were suing – a nifty feature the voters abolished in the 2004 election with Proposition 64). 

And that’s it! No reported California decisions on point at all.   Until this one.  On July 11, the Court of Appeal certified the case for publication.  Which means the scenarios described below are a whole lot less likely.

So why in the world did the Court of Appeal decide not to publish this?  California Rules of Court Rule 81105(c) provides a long list of grounds for publishing appellate decisions, including the following:

(c) Standards for certification

An opinion of a Court of Appeal or a superior court appellate division-whether it affirms or reverses a trial court order or judgment-should be certified for  publication in the Official Reports if the opinion:

(1)  Establishes a new rule of law;

(2)  Applies an existing rule of law to a set of facts significantly different from those stated in published opinions . . . .

Well, CBL doesn’t know if this is a “new rule of law,” or “an existing rule of law” but it isn’t stated anywhere in any California published opinion that CBL has been able to find.

The lack of a definitive published California decision until now has resulted in the following perverse scenarios:

• In Crawford Laboratories, the insured company ran up attorneys’ fees and costs of $117,500 before settling with As You Sow, the bounty hunter, for $3,000.
• In H.P.F., L.L.C. the insured company wasn’t so lucky.  It ran up a fee and cost bill of $317,779.04 before reaching whatever disposition it  came to.
• In Ulta Salon, the case we’re talking about today, Ulta Salon paid fees and costs to its defense counsel of $214,684 before settling the case for – wait for it -- $25K.

Now, it may be that the $200K in legal work is why Ulta Salon only had to pay $25K in settlement, right?  CBL doesn’t know the answer to that question.  But CBL does know this:  Ulta Salon was one of 18 defendants sued by this bounty hunter for alleged Proposition 65 violations involving nail products.  If the Attorney General’s web site is correct, she settled with a grand total of three of them.  All three agreed to take the chemical (DBP) out of their nail products.  One paid her $2,500.  One paid her $6,000.  And Ulta Salon paid her $25,000.

So the moral of this story is this (remember?  CBL told you there was a moral):  If a company gets sued under Proposition 65, it needs to decide what it wants to do at the outset.  Want to defend the case?  Great.  Go for it.  Just prepare to go the distance.  Want to treat the case as an expensive traffic ticket, pay it and get it behind you?  Sorry to hear it.  But do it now.  Don’t do it after $100K or $200K or $300K worth of litigatin’.