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Archive for January, 2019

The Supreme Court Weighs in on Arbitrability, But Questions Remain

Posted on: January 31st, 2019

By: Ted Peters

As reflected in a prior article, the United States Supreme Court recently agreed to take another look at the issue of arbitrability. In the case of Henry Schein, Inc. v. Archer & White Sales, Inc., the Fifth Circuit concluded that the court, and not an arbitrator, had the power to decide the threshold issue of arbitrability. In its ruling, the circuit court embraced the “wholly groundless” argument, concluding that submission of the dispute to the arbitrator was unnecessary because the assertion of arbitrability was “wholly groundless.” This decision underscored the ongoing split of authority among the lower courts wherein some courts, but not all, recognize the “wholly groundless” exception. On appeal, the appellants sought to have the Supreme Court reject the exception as inconsistent with the Federal Arbitration Act (“FAA”), the purpose of which is “to ensure that private agreements to arbitrate are enforced according to their terms.”

On January 8, 2019, newly appointed Justice Kavanaugh delivered the opinion of the court vacating and remanding the Firth Circuit’s decision. Writing for a unanimous court, Kavanaugh determined that the “wholly groundless” exception to the general rule that courts must enforce contracts that delegate arbitrability questions to an arbitrator is inconsistent with the FAA and Supreme Court precedent. Not surprisingly, the opinion revisited a number of prior cases in which the Court repeatedly held that the “agreement to arbitrate a gateway issue is simply an additional… agreement the party seeking arbitration asks the federal court to enforce, and the [FAA] operates on this additional arbitration agreement just as it does on any other.” (Opinion at p. 4, quoting Rent-A-Center, 561 U.S. 63, 70 (2010)). Kavanaugh noted that the Court had frequently rejected the argument that a claim of frivolity can derail the parties’ agreement to vest questions of arbitrability with an arbitrator and not a court. Citing Steelworkers v. American Mfg. Co., 363 U.S. 564, 568 (1960), Kavanaugh stated: “A court has ‘no business weighing the merits of the grievance’ because the ‘agreement is to submit all grievances to arbitration, not merely those which the court will deem meritorious.’”

On January 15, 2019, the Court issued a ruling in yet another case involving arbitration, New Prime Inc. v. Oliveira. Justice Gorsuch delivered the opinion of the court. In an 8-0 decision (Kavanaugh took no part in the consideration or decision of the case), the high court affirmed the First Circuit’s determination that a court should determine whether the Federal Arbitration Act’s Section 1 exclusion for disputes involving the “contracts of employment” of certain transportation workers applies before ordering arbitration. Unlike Henry Schein, which addressed the delegation of “gateway” questions of arbitrability, New Prime Inc. involved the judicial assessment of a statutorily based objection to arbitration.

But wait… there’s (one) more: Lamps Plus Inc. v. Varela, Dkt. No. 17-988. That case, argued on October 29, 2018, addresses whether the FAA forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements. An opinion is expected at any time.

Coming full circle, it is fairly clear that the high court seems to remain firm in its embrace of arbitration agreements without permitting judicial meddling, provided there is “clear and unmistakable evidence” that the parties affirmatively agree to delegate the decision of arbitrability to the arbitrator. (Henry Schein at p. 6, citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944). Yet, at the same time, the Justices appear receptive to judicial involvement as long as there is a reasonable statutory basis for it.

The takeaway? Parties to arbitration agreements should rest confident in their ability to affirmatively delegate disputes to arbitration provided that the statutory framework upon which arbitration is based leaves no basis for judicial tinkering. This may provide solace for some, but for many it leaves unanswered questions along with the risks and costs associated with uncertainty.

If you have questions or would like more information, please contact Ted Peters at [email protected].

California Court Clarifies Grounds for Law Firm Disqualification

Posted on: January 30th, 2019

By: Brett Safford

In O’Gara Coach Company, LLC v. Joseph Ra, 2019 Cal.App. Lexis 12, the California Court of Appeal clarified the grounds on which a law firm can be disqualified. The Court reversed the decision of the trial court and disqualified Richie Litigation PC from representing Joseph Ra, a former executive of O’Gara Coach Company, LLC, in litigation involving Ra and O’Gara Coach. The Court held that disqualification is warranted because Darren Richie, the founder of Richie Litigation, formerly served as O’Gara Coach’s president and chief operating officer, and in those roles, he served a primary point of contact for the company’s outside counsel and possessed “confidential information, protected by O’Gara Coach’s attorney-client privilege, concerning Ra’s allegedly fraudulent activities at issue in this litigation.” The Court disqualified Richie Litigation even though Richie was not a licensed attorney when serving as O’Gara Coach’s president and chief operating officer and never had an attorney-client relationship with the company. The Court further held that vicarious disqualification of the entire firm, not only Richie, is warranted under the doctrine of imputed knowledge.

The litigation between O’Gara Coach and Ra arose from a lawsuit filed by Marcelo Caraveo, a former customer of O’Gara Coach, alleging wrongful conduct by O’Gara Coach, Ra, and others relating to Caraveo’s acquisition of luxury vehicles from O’Gara Coach. Ra filed a cross-complaint against O’Gara Coach for indemnity, and O’Gara Coach filed a cross-complaint against Ra, Caraveo, and others alleging that Ra and Caraveo “were the primary architects” of a fraudulent scheme involving the sale, leasing, and financing of vehicles.

Richie’s employment with O’Gara Coach terminated in 2016. In May 2017, Richie filed articles of incorporation for Richie Litigation which named Robert Lu as the sole officer and director.  In June 2017, Lu substituted as counsel of record for Ra. In August 2017, Richie was admitted to the California State Bar.

In October 2017, O’Gara Coach moved to disqualify Richie Litigation based on two reasons. First, O’Gara Coach argued that although Richie was not a licensed attorney when employed by the company, “the court should apply the rule requiring disqualification of attorneys representing adverse parties in successive representations when, as here, the matters are substantially related, as well as the rule that, when a former client’s confidential information is known to any attorney at a law firm, the entire firm must be disqualified.” Second, O’Gara Coach argued disqualification of Richie Litigation is warranted because Richie was privy to O’Gara Coach’s privileged information, and “Richie Litigation is not entitled to exploit that information in litigation adverse to the company.” The Court of Appeal rejected the first argument, but agreed with the second, holding that the trial court “erred in failing to consider O’Gara Coach’s alternate argument that disqualification of Richie and his law firm was required as a prophylactic measure because the firm was in possession of confidential information, protected by O’Gara Coach’s attorney-client privilege, concerning Ra’s allegedly fraudulent activities at issue in this litigation.”

The Court of Appeal explained that O’Gara Coach presented undisputed evidence that Richie participated in meetings and communications with outside counsel who were investigating Ra’s activities and “developing theories material to O’Gara Coach’s defense and forming the basis for its cross-claims in this litigation and that are protected by lawyer-client privilege.”  As the privilege belongs to O’Gara Coach, Richie cannot disclose privileged information without O’Gara Coach’s consent.  The Court further concluded, “[N]ow that Richie is a member of the California State Bar, O’Gara Coach is entitled to insist that he honor his ethical duty to maintain the integrity of the judicial process by refraining from representing former O’Gara Coach employees in this litigation against O’Gara Coach that involve matters as to which he possesses confidential information.”

The Court of Appeal further held that Richie Litigation is variously disqualified because “once a showing has been made that someone at the adverse party’s law firm possesses confidential attorney-client information materially related to the proceedings before the court, a rebuttable presumption arises that the information has been used or disclosed in the current employment,” and Ra did not present evidence that Richie had been screened from Lu or other lawyers at the firm working on the pending litigation. As such, the Court held that “the doctrine of imputed knowledge requires the vicarious disqualification of the entire Richie Litigation firm.”

O’Gara Coach emphasizes the paramount importance of protecting client confidences and the attorney-client privilege to ensure the “integrity of the judicial process.” An attorney must not only be mindful of his or her own prior relationships with an opposing party, but also of the prior relationships between other attorneys in his or her firm and an opposing party. Without thorough conflict checks, firms may subject themselves to disqualification and other costly repercussions from their clients.

If you have any questions or would like more information, please contact Brett Safford at [email protected].

California Enacts New Anti-Fraud Laws To Protect HOA Members

Posted on: January 24th, 2019

By: Greg Fayard

In California, an anti-fraud bill designed to protect HOA members sailed unopposed through the legislature becoming law January 1, 2019.

The Community Associations Institute and the California Association of Community Managers sponsored the bill, which makes various changes to California’s Davis-Sterling Common Interest Development Act—the statutory scheme governing HOAs in the state. The purpose of the bill was “to take important steps to protect [HOA members] from fraudulent activity by those entrusted with the management of the association’s finances.”

The bill changed California’s Civil Code related to homeowner association money management to require any transfer of $10,000 or 5% of total association combined reserve and operating deposits (whichever is smaller) have prior written approval from the association’s board. (Civ. Code, §§ 5380(b)(6) and 5502.)

The new law prevents overly active board officers or HOA managers who pay bills or transfer funds without first getting explicit board approval. The intent of the new statute appears to require express permission for each individual transfer over $10,000 or 5% of the association’s deposits. Advance written authorization from a board is required not only for payments and withdrawals but also deposits and transfers between association accounts.

Civil Code section 5500 has required boards to at least quarterly review the HOA’s operating and reserve accounts, the reserve revenues and expenses compared to budget, the latest account statements, and income and expense statements for each HOA bank account. Under the amended Civil Code section 5500, these reviews must now be monthly, not quarterly.

Fortunately, new Civil Code section 5501 allows boards to meet the financial review requirements without meeting. The review, however, must be performed by each director or by a subcommittee consisting of the treasurer and another director, with ratification of this review noted at the next open board meeting.

The last new anti-fraud law change is new Civil Code section 5806. This statute requires all associations have fidelity (dishonesty) insurance in an amount equal to at least the total reserve funds plus three months of assessments. The insurance must include computer fraud and funds transfer fraud and must cover the association’s management company if the HOA is professionally managed.

All these changes have one purpose in mind: prevent financial fraud from being perpetrated on HOA members by their HOA leaders.

If you have any questions or would like more information, please contact Greg Fayard at [email protected].

Florida Employment Law and The Use of Consistent Terminology

Posted on: January 17th, 2019

By: Michael Kouskoutis

Florida’s First DCA recently reversed summary judgment in favor of Florida A&M University (FAMU) in a contract dispute with the school’s former head football and basketball coaches.

The coaches both had 4-year contracts with the University, each with a specific end date and permitting early termination only in specific circumstances.  Well before their contractual end dates, both coaches received 60 days’ notice of termination, with neither coach having committed any of the terminable offenses listed in the contract. The coaches filed suit, demanding (among others) payment on the remainder of the contracts. On FAMU’s motion for summary judgment, the trial court agreed with the University, that the terminations were justified by the University’s regulations, which permit employee termination upon 60 days’ notice.

On appeal, the First DCA emphasized that FAMU did not use consistent terminology with respect to termination in its regulations and employment contracts, leading the Court to conclude that an ambiguity exists since different meanings may have been intended. Further, because the Court determined that the termination provisions were ambiguous, it also reversed summary judgment on the coaches’ claims for fraudulent inducement and negligent misrepresentation.

As this case awaits trial, employers should be mindful of the terminology used among its employment and regulatory documentation.  If you have any questions or would like more information, please contact Michael Kouskoutis at [email protected].

School Shootings: Is There a Constitutional Duty to Protect Students?

Posted on: January 16th, 2019

By: Jake Daly

Sadly, our nation’s schools are not free from shootings and other violent crimes. When such crimes occur on private property, the laws of many states provide the victims a remedy (money damages) against the owner of the property and/or the operator of the business located on the property. But what about crimes that occur on public property, particularly a school campus?

For example, Nikolas Cruz killed 17 students and school officials and injured 17 more during a shooting rampage at Marjory Stoneman Douglas High School in Parkland, Florida, on February 14, 2018. Fifteen students who survived the incident, but who claim to have suffered psychological injuries because of it, sued Broward County, Andrew Medina (a school monitor), Robert Runcie (school superintendent), Scott Israel (Broward County Sheriff), Jan Jordan (captain with the Broward County Sheriff’s Office), and Scot Peterson (school resource officer) for violating their substantive due process rights under the Fourteenth Amendment to the United States Constitution. Specifically, the plaintiffs alleged that the defendants had a constitutional duty to protect them from Cruz and that they violated this duty by intentionally disregarding warnings about Cruz, by maintaining a policy of allowing “killers to walk through a school killing people without being stopped,” and by failing to provide adequate training to school officials. The defendants denied liability on the ground that there is no constitutional duty to protect students from being harmed by third parties.

The lawsuit was filed in the United States District Court for the Southern District of Florida and was assigned to Judge Beth Bloom, who was nominated by President Barack Obama and confirmed by the Senate in 2014. In her order granting the defendants’ motions to dismiss, Judge Bloom relied on United States Supreme Court precedent holding that the Due Process Clause is “a limitation on the State’s power to act, not . . . a guarantee of certain minimal levels of safety and security.” In other words, “nothing in the language of the Due Process Clause itself requires the State to protect the life, liberty, and property of its citizens against invasion by private actors,” such as Cruz. Nevertheless, the Due Process Clause does impose a duty on state actors to protect people who are in their custody from harm by third parties. But, as Judge Bloom ruled, this duty does not apply to this case because students are not considered to be in the custody of the state such that they have been deprived of their ability to take care of themselves. Accordingly, the defendants did not violate the plaintiffs’ substantive due process rights.

This case serves as a good reminder that the defendant in any case must have owed the plaintiff a legal duty to act or refrain from acting in a specific way. A moral duty will not suffice. Liability cannot be based on how innocent or sympathetic the plaintiff is. Nor can liability be based on the fact that a tragic event has occurred. There is no question that the plaintiffs in this case were innocent and “deserving,” but that is not enough. There must have been a legal duty. The plaintiffs in this case lost because there is no constitutional duty owed by school officials to protect students from harm inflicted by third parties. To some, this rule may be seen as unfair and contrary to common sense, but there are good policy reasons for it. After all, the purpose of the Due Process Clause was to protect people from the state, not to ensure that the state protected them from each other.

For additional information, please contact Jake Daly at [email protected] or (770) 818-1431.