Sargon Enterprises v. Browne George Ross ( 2017 )

Filed 9/26/17
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION THREE
SARGON ENTERPRISES, INC., B271718
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC546363)
v.
BROWNE GEORGE ROSS LLP,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Los
Angeles County, Fredrick C. Shaller, Judge. Affirmed in part
and reversed in part with directions.
Law Offices of Kyle P. Kelley and Kyle P. Kelley for
Plaintiff and Appellant.
Browne George Ross LLP, Eric M. George, Benjamin D.
Scheibe and Ira Bibbero for Defendant and Respondent.
_________________________
Respondent Browne George Ross LLP (BGR) represented
appellant Sargon Enterprises Inc. (Sargon) in long-running
litigation against the University of Southern California (USC).
After that litigation concluded, Sargon filed the present legal
malpractice action against BGR. BGR petitioned to compel
arbitration, and the superior court granted the petition and
ordered the parties to arbitrate.
The parties litigated two claims before the arbitrator:
Sargon’s claim against BGR for legal malpractice, and BGR’s
claim against Sargon for breach of contract. The breach of
contract claim alleged that the parties’ arbitration agreement
precluded resort to the courts to resolve disputes, and thus that
Sargon’s filing of the malpractice action constituted a breach of
the arbitration agreement.
The arbitrator found Sargon’s legal malpractice claim was
barred by a release of claims earlier entered into by the parties.
The arbitrator also found that Sargon had breached the
arbitration agreement by filing the malpractice action in superior
court and ordered Sargon to pay BGR damages of $200,000. The
trial court confirmed the arbitration award and entered
judgment.
We reverse in part. We conclude that the arbitrator erred
in finding that the parties’ arbitration agreement included a
promise to forego litigation, and thus in concluding that Sargon
breached the arbitration agreement by filing a malpractice action
in superior court. We further conclude that the arbitrator’s
award violated Sargon’s statutory right, as articulated in the
2
California Arbitration Act (the Act), Code of Civil Procedure1
section 1280 et seq., to seek a preliminary determination of
arbitrability from a court. Therefore, notwithstanding the
limited judicial review generally afforded arbitration awards, the
present arbitration award is subject to correction.
We do not, however, vacate the arbitration award in its
entirety. Because there is no basis for reversing the summary
disposition of Sargon’s legal malpractice claim against BGR—and
because the breach of contract and legal malpractice claims
depend on entirely separate facts and legal theories—we can
strike the portion of the arbitration award adjudicating BGR’s
breach of contract claim without affecting the merits of the
arbitrator’s summary disposition of Sargon’s malpractice claim.
We therefore direct the trial court to correct the arbitration
award and, as corrected, to confirm it.
FACTUAL AND PROCEDURAL BACKGROUND
I.
The Sargon/USC Litigation
A. First Trial and Appeal
In 1991, Sargon patented a dental implant developed by its
president and chief executive officer, Dr. Sargon Lazarof
(Lazarof). In 1996, Sargon contracted with USC to conduct a
five-year clinical study of the implant. (Sargon Enterprises, Inc.
v. University of Southern California (2012) 55 Cal. 4th 747, 754–
755 (Sargon).)
1 All subsequent undesignated statutory references are to
the Code of Civil Procedure.
3
In May 1999, Sargon sued USC and members of its faculty
for breach of contract. USC cross-complained. (Sargon, supra,
55 Cal.4th at p. 754.)
Before trial, the trial court excluded evidence of Sargon’s
lost profits on the ground that USC could not reasonably have
foreseen them. A jury then found that USC had breached the
contract, and it awarded Sargon $433,000 in compensatory
damages. The jury also found in Sargon’s favor on USC’s cross-
complaint. (Sargon, supra, 55 Cal.4th at p. 754.)
Sargon appealed. The Court of Appeal reversed the
judgment, holding that the trial court had erred in excluding
evidence of Sargon’s lost profits. (Sargon, supra, 55 Cal.4th at
p. 754.)
B. Sargon’s Retention of Browne, Woods & George LLP
In 2005, Sargon retained Browne, Woods & George LLP
(BWG) (now known as BGR) to represent it on remand.2 The
retainer agreement signed by Sargon and BWG in September
2005 contained an arbitration clause, which provided as follows:
“Any and all disputes, claims, or proceedings between you and
BWG arising out of or relating to any work or services performed
by BWG, the nature, terms, or enforceability of this Agreement,
any claims for malpractice or professional negligence, collection
or payment of bills, fees, and costs, or any dispute of any nature
between you and BWG shall be settled by binding and final
arbitration held before a single arbitrator from JAMS. . . .
[¶] The parties agree to split evenly the fees and costs of the
2 In this opinion, we will sometimes use “BGR” to refer to
both Browne, Woods & George LLP and Browne George Ross
LLP.
4
arbitrator. Arbitration is final and binding on both BWG and
you. You and BWG are waiving the right to seek remedies in
court, including the right to jury trial. Pre-arbitration discovery
is generally more limited than, and different from, court
proceedings. An arbitration award is not required to include
factual findings or legal reasoning, and your and BWG’s right to
appeal or to seek modification of arbitration rulings is strictly
limited.”
C. Second Trial
Sargon’s case against USC proceeded to retrial. USC
moved to exclude as speculative the proffered opinion testimony
of one of Sargon’s experts, James Skorheim. At the conclusion of
an eight-day evidentiary hearing, the trial court excluded
Skorheim’s testimony. (Sargon, supra, 55 Cal.4th at pp. 755–
767.) Thereafter, in August 2007, the parties stipulated to entry
of judgment for Sargon on the breach of contract claim in the
amount of $433,000.
D. The Interpleader Action
In January 2008, following entry of the stipulated
judgment, USC filed an interpleader action against Sargon and
several law firms, including BGR, for the resolution of attorney
fee disputes. Sargon asked BGR to represent it in the
interpleader action.
Before accepting the representation, BGR sent Dr. Lazarof
a letter stating that the firm’s representation of Sargon presented
a potential conflict of interest, as a result of which the firm
“would not feel comfortable proceeding absent your written,
informed consent indicating that there are no actual or potential
disputes or claims between you and our firm accompanied by full
mutual releases between my firm and you.” The letter then
5
stated as follows: “[O]ther than rights and responsibilities
specifically set forth in the [September 2005 retainer
agreement]—all of which shall bind the parties only from this
point forward—there are no additional rights, claims, obligations,
liabilities or responsibilities (whether past or present) between
you and my firm. . . . Thus, each party based on known facts
accordingly represents and warrants that he/it hereby releases
and absolutely forever discharges the other(s) of and from any
and all claims . . . and causes of action of every kind and nature
whatsoever, by reason of any matter or thing that directly or
indirectly is connected with the Action or the parties’ relationship
as of the date of this Agreement. . . .” Lazarof signed the letter on
behalf of himself and Sargon in February 2008.
E. The Second Appeal
Sargon appealed from the judgment entered after the
second trial. In February 2011, the Court of Appeal reversed the
judgment on the ground Sargon’s expert’s testimony should have
been admitted, and it remanded for a new trial on lost profits; it
also affirmed the trial court’s $1.8 million attorney fee award to
Sargon. (Sargon, supra, 55 Cal.4th at pp. 767.) However, the
Supreme Court granted review and reversed the decision of the
Court of Appeal, effectively affirming the $433,000 stipulated
judgment. (Id. at p. 781.)
II.
The Present Action
A. Sargon’s Legal Malpractice Complaint Against BGR
Sargon filed a complaint for legal malpractice against BGR
in May 2014. The complaint alleged that in August 2007, BGR
advised Sargon to enter into a stipulated judgment with USC
before appealing the order excluding the testimony of Sargon’s
6
lost profits expert. When that order ultimately was affirmed,
Sargon allegedly was not permitted to offer alternative evidence
of lost profits because BGR had failed to preserve the issue.
Sargon asserted that BGR “knew or should have known that
Sargon’s entry into a stipulated judgment [might] preclude
Sargon from introducing evidence relating to lost profits. [BGR],
however, advised Plaintiff Sargon to enter into the stipulated
judgment. [BGR’s] advice, which precluded Sargon from
introducing evidence relating to lost profits, fell below the
standard of care.”
B. BGR’s Demand for Arbitration and Motion to Compel
Arbitration
BGR filed a demand for arbitration with JAMS in June
2014. BGR asserted two claims: “(1) for damages resulting from
[Sargon’s] breach of the arbitration clause in the parties’
September 2, 2005 engagement and fee agreement, and (2) to
procure an award of declaratory relief establishing the lack of
merit to [Sargon’s] lawsuit entitled Sargon Enterprises, Inc. v.
Browne George Ross, LASC Case No. BC546363 (filed May 20,
2014).” Sargon filed an “Answer and Counter-Claim for Legal
Malpractice.”
BGR then filed a petition to compel arbitration of Sargon’s
pending superior court action for legal malpractice. The petition
asserted that under the terms of the 2005 retainer agreement,
“[a]ny and all disputes between BGR and [Sargon] regarding
BGR’s representation of [Sargon] must be resolved in
arbitration.” Sargon opposed the petition to compel, contending
that although it had agreed to arbitrate disputes with BWG, it
had never entered into such an agreement with BGR.
7
On August 26, 2014, the trial court found that BGR “has
met its burden of proof that there is a valid binding arbitration
clause in the 9/2/05 retainer agreement between [Sargon] and
BWG (now known as [BGR]) and that it is enforceable.” The
court granted the petition and ordered the parties to arbitrate.
III.
Arbitration Proceedings and Petition to
Confirm Arbitration Award
A. Arbitration Proceedings
1. Sargon’s legal malpractice claim
The arbitrator summarily rejected Sargon’s legal
malpractice claim. The arbitrator found that in February 2008,
when Sargon retained BGR to represent it in the interpleader
action, Sargon released BGR and its attorneys from all claims
that existed as of that date. Further, “there is no material issue
of fact as to whether the facts giving rise to [Sargon’s] pleaded
claims of malpractice were known to [Sargon] at the time
Dr. Lazarof executed the Release Agreement in February 2008.
Those facts—BGR’s advice to enter into the stipulated judgment
in the USC Action and the effect thereof—were known to
[Sargon] at the time of the advice and in February 2008. [¶] . . .
All claims based on these facts therefore were released.”
2. BGR’s breach of contract claim
Sargon sought leave to file a motion seeking summary
disposition of BGR’s breach of contract claim, urging that Sargon
had a constitutionally protected right to file a lawsuit. The
arbitrator denied Sargon’s request. Subsequently, the arbitrator
held a one-day hearing on BGR’s breach of contract claim. At the
conclusion of the hearing, the arbitrator found as follows:
8
(1) BGR proved the existence of a contract—namely, the
retainer agreement entered into between the parties in
September 2005. Sargon breached the retainer agreement by
filing a malpractice action against BGR in the superior court, “in
contravention of the clea[r] contractual clause mandating
arbitration for ‘[a]ny and all disputes, claims, or proceedings
between [Sargon] and BWG . . . .”
(2) BGR suffered damages as a result of Sargon’s breach.
“[Sargon’s] breach caused the very injuries—the public airing of a
dispute, and multiplication of legal proceedings—[that]
arbitration is intended to prevent. [Sargon’s] lawsuit was
publicized nationally, with the headlines ‘Browne George Faces
Malpractice Suit Over Sargon-USC Row’ and ‘Browne George
Gets Arbitration For Sargon Malpractice Suit.’ [Sargon’s] lawsuit
also multiplied legal proceedings in this matter, as BGR was
required to litigate the post hoc justifications proffered by
[Sargon] in an effort to maintain its lawsuit in court, rather than
submit to arbitration, as the Engagement Agreement mandated.”
Accordingly, Sargon “inflicted injury on BGR’s reputation, for
which [Sargon] is liable for general damages.”
(3) Sargon also breached the implied covenant of good
faith and fair dealing. Specifically, Sargon unfairly interfered
with BGR’s right to receive the benefits of the contract, by
breaching the arbitration clause without a good faith belief in its
right to do so. After filing the lawsuit and being apprised of the
arbitration clause, Sargon did not voluntarily dismiss its lawsuit
and submit its claims to arbitration.
The arbitrator therefore found that BGR had proven that
Sargon breached the retainer agreement and awarded BGR
$200,000 “as damages against [Sargon].”
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B. Order Confirming Arbitration Award; The Present
Appeal
BGR petitioned to confirm the arbitration award; Sargon
opposed the petition to confirm and cross-petitioned to vacate.
Sargon argued that the damage award against Sargon for breach
of contract exceeded the arbitrator’s powers because it violated
Sargon’s constitutional right to petition, and the arbitrator’s
award of damages was not rationally related to Sargon’s breach.3
The trial court granted the petition to confirm and denied
the petition to vacate. Judgment on the arbitration award was
entered, and Sargon timely appealed.
On July 5, 2017, we issued a letter pursuant to
Government Code section 68081 asking the parties to brief the
following issues: “(1) Does the California Arbitration Act,
including without limitation Code of Civil Procedure sections
1281.2, 1281.7, and 1281.12, express a legislative intent that
issues of arbitrability should be resolved by a superior court
unless an arbitration agreement specifically provides otherwise?
[¶] (2) If so, was the arbitrator’s breach of contract award for
Sargon’s filing of the underlying legal malpractice action
inconsistent with Sargon’s statutory rights or an explicit
legislative expression of public policy, within the meaning of
Moncharsh v. Heily & Blase (1992) 3 Cal. 4th 1, 32 [(Moncharsh)],
Board of Education v. Round Valley Teachers Assn. (1996) 13
Cal. 4th 269, 275–277 [(Round Valley)], and Richey v. AutoNation,
Inc. (2015) 60 Cal. 4th 909, 916–917 [(Richey)]?” Both parties
filed letter briefs responding to these questions.
3 Sargon did not seek to vacate the arbitrator’s ruling on its
legal malpractice claim.
10
CONTENTIONS
Sargon contends that the arbitrator’s award of breach of
contract damages violated Sargon’s constitutional and statutory
right to petition the courts, and the award is subject to judicial
review because it contravenes a statutory right or an explicit
legislative expression of public policy.
BGR contends that Sargon waived the right to challenge
the arbitrator’s award of contract damages. Alternatively, BGR
urges that the arbitrator’s award is consistent with Sargon’s
right of petition and, in any event, the award is not subject to
substantive judicial review.
DISCUSSION
I.
Sargon Did Not Waive Its Right to Challenge
the Arbitrator’s Award of Contract Damages
We begin with BGR’s contention that Sargon waived its
objection to the breach of contract award. BGR asserts that a
party may “waive any objection to arbitrability by voluntarily
submitting to the jurisdiction of the arbitrator, or participating in
an arbitration proceeding without objecting to arbitral
jurisdiction.” In the present case, BGR contends that Sargon
waived any objection to the arbitrator considering the breach of
contract claim because Sargon did not assert it in the trial court
“pre-award.”
BGR’s waiver argument is without merit. Our Supreme
Court rejected a similar argument in Moncharsh, supra,
3 Cal.4th at p. 29. There, Moncharsh petitioned the superior
court to vacate or correct an unfavorable arbitration award,
contending that the parties’ agreement to arbitrate was
contained within an employment contract with an illegal fee-
11
splitting agreement. The defendant responded that Moncharsh
had waived the illegality issue by failing to raise it in the trial
court pre-award. The Supreme Court concluded that because the
asserted illegality claim would not have been a proper basis for
opposing a petition to compel arbitration under section 1281.2,
Moncharsh was not required to raise the issue in the trial court
pre-award. The Court explained: “Moncharsh does not contend
the alleged illegality constitutes grounds to revoke the entire
employment contract. Nor does he contend the alleged illegality
voids the arbitration clause of that contract. Accordingly, the
legality of the fee-splitting provision was a question for the
arbitrator in the first instance. Thus, Moncharsh was not
required to first raise the issue of illegality in the trial court in
order to preserve the issue for later judicial review.” (Moncharsh,
supra, 3 Cal.4th at p. 30, italics added.)
As relevant to the present case, the statutory grounds on
which a party may oppose arbitration are limited: Pursuant to
section 1281.2, a court “shall” order parties to arbitrate if it
determines that an agreement to arbitrate exists, unless it finds
that (a) the right to compel arbitration has been waived by the
moving party, (b) grounds exist for revocation of the agreement,
or (c) a party to the arbitration agreement is also a party to a
pending court action with a third party arising out of the same
transaction. The statute is explicit, moreover, that if the court
determines a written agreement to arbitrate a controversy exists,
an order to arbitrate such controversy “may not be refused on the
ground that the petitioner’s contentions lack substantive merit.”
(§ 1281.2, italics added.)
In the present case, Sargon’s contention that breach of
contract damages were not recoverable went to the “substantive
12
merit” of BGR’s claims, not to waiver or revocation. Accordingly,
such contention was not a proper basis on which to oppose the
order to arbitrate, and Sargon’s failure to oppose arbitration on
that ground did not waive the issue.
Sargon was required to raise its objection to a breach of
contract award with the arbitrator in order to preserve it for
judicial review (Moncharsh, supra, 3 Cal.4th at p. 30), and it did
so. Prior to the arbitration hearing, Sargon urged the arbitrator
to summarily dispose of BGR’s breach of contract claim because
BGR was seeking to recover damages for Sargon’s “act of filing a
lawsuit,” which it alleged was “constitutionally privileged
conduct.” Sargon made the same point in its opening statement
before the arbitrator, asserting that the damages BGR sought
“aren’t recoverable based upon the filing of a lawsuit because
that’s a privileged act under the [Code of Civil Procedure].”
Then, at the conclusion of the arbitration hearing, Sargon
submitted proposed findings of facts and conclusions of law
urging that BGR was not entitled to breach of contract damages
because (1) BGR obtained specific performance and made a
binding election of remedies, (2) “the Legislature has spoken in
great detail on the issue of contractual arbitration in the
California Arbitration Act, which contains no provisions
permitting damages to be awarded when a party seeks relief in
Court,” and (3) “the public policy goals served by arbitration as
expressed in the California Arbitration Act cannot overcome the
constitutional right of litigants to petition their government for
redress.” Accordingly, Sargon adequately preserved for our
review the issue of the arbitrator’s power to award breach of
contract damages. We turn now to that issue.
13
II.
Judicial Review of Arbitration Awards
A. Overview
The legal standards governing judicial review of arbitration
awards are well established. “California law favors alternative
dispute resolution as a viable means of resolving legal conflicts.
‘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.’
(Moncharsh[, supra,] 3 Cal.4th [at p.] 10).) Generally, courts
cannot review arbitration awards for errors of fact or law, even
when those errors appear on the face of the award or cause
substantial injustice to the parties. (Id. at pp. 6, 28.) . . . .
“The California Arbitration Act (Code Civ. Proc., § 1280 et
seq.) and the Federal Arbitration Act (9 U.S.C. § 10 et seq.)
provide limited grounds for judicial review of an arbitration
award. Under both statutes, courts are authorized to vacate an
award if it was (1) procured by corruption, fraud, or undue
means; (2) issued by a corrupt arbitrator; (3) affected by
prejudicial misconduct on the part of the arbitrator; or (4) in
excess of the arbitrator’s powers. (Code Civ. Proc., § 1286.2,
subd. (a); 9 U.S.C. § 10(a).) An award may be corrected for
(1) evident miscalculation or mistake; (2) issuance in excess of the
arbitrator’s powers; or (3) imperfection in the form. (Code Civ.
Proc., § 1286.6; 9 U.S.C. § 11.)” (Richey, supra, 60 Cal.4th at
p. 916.) Our analysis concerns whether the arbitrator acted in
excess of his powers when he awarded BGR damages for Sargon’s
filing the malpractice action in superior court. (Code Civ. Proc.,
§ 1286.2, subd. (a)(4).)
14
We review de novo the trial court’s decision that the
arbitrator did not exceed his powers. (Richey, supra, 60 Cal.4th
at p. 918, fn. 1; Ling v. P.F. Chang’s China Bistro, Inc. (2016) 245
Cal. App. 4th 1242, 1252.)
B. Notwithstanding the Limited Judicial Review
Normally Afforded Arbitration Awards, an Award
Must Be Vacated If It Violates a Party’s Statutory
Rights or Clearly Defined Public Policy
One of the ways an arbitrator exceeds his or her powers is
by issuing an award “that violates a party’s unwaivable statutory
rights or that contravenes an explicit legislative expression of
public policy.” (Richey, supra, 60 Cal.4th at p. 916.) Thus,
although our Supreme Court has noted that arbitral “finality is
the rule rather than the exception” (Round Valley, supra,
13 Cal.4th at p. 277), it has on several occasions vacated
arbitration awards that violate a party’s statutory rights or well-
defined public policy. Two such cases are illustrative.
In Round Valley, a school district notified a probationary
teacher that it would not renew his teaching contract for the
following academic year. The teacher filed a grievance with the
district, alleging that the nonrenewal violated a provision of the
collective bargaining agreement (CBA) entered into by the
district and a teachers’ association. That provision required the
district to provide reasons for a decision not to renew a teaching
contract and to provide a right to appeal. (Round Valley, supra,
13 Cal.4th at p. 273.)
An arbitrator found the district had violated the CBA and
ordered it to comply. (Round Valley, supra, 13 Cal.4th at p. 273.)
The district then petitioned the superior court to vacate the
arbitrator’s award, urging that the award violated provisions of
15
the Education Code that permitted the district to decline to
renew a teaching contract without providing a statement of
reasons or a right of appeal. (Id. at pp. 273–274.) The trial court
granted the district’s petition and vacated the award. (Id. at
p. 274.)
The Supreme Court held that the trial court properly
vacated the arbitration award. It explained that when the
Legislature amended the Education Code in 1983, it established a
contract renewal procedure in which a hearing and a statement
of reasons were not required. Further, under the statutory
scheme governing collective bargaining and the reelection of
probationary teachers, “a school district’s decision not to reelect a
probationary teacher after the second year of employment is
vested exclusively in the district and may not be the subject of
collective bargaining.” (Round Valley, supra, 13 Cal.4th at
p. 287.) The arbitrator’s contrary decision conflicted with the
statute, and “because the arbitrator’s decision below is
inconsistent with District’s statutory rights under the Education
Code, the issue is subject to judicial review.” (Id. at pp. 287–288.)
The Supreme Court similarly concluded in Pearson Dental
Supplies, Inc. v. Superior Court (2010) 48 Cal. 4th 665 (Pearson
Dental). There, an employer fired the plaintiff, a janitor, when he
was 67 years old. The plaintiff filed a complaint in superior court
alleging age discrimination and wrongful termination. (Id. at
p. 670.) The employer filed a motion to compel arbitration,
contending that the plaintiff was bound by a dispute resolution
agreement requiring him to submit any disputes arising out of
the employment relationship to binding arbitration within one
year of the date the dispute arose. (Id. at pp. 670–671.) The trial
court granted the motion to compel. Thereafter, the arbitrator
16
found the plaintiff’s claims were time-barred because they had
been submitted to arbitration more than a year after the
plaintiff’s termination. (Ibid.) The trial court vacated the
arbitration award, concluding that the arbitrator had made an
error of law by, among other things, misinterpreting the tolling
provisions of section 1281.12. (Id. at p. 672.)
The Supreme Court agreed with the trial court that the
arbitration award was properly vacated. It explained that the
arbitrator had made a clear error of law because under the tolling
provision of section 1281.12, the plaintiff’s filing of the civil action
tolled the applicable time limitations contained in the arbitration
agreement, and thus plaintiff’s claims were not time-barred.
(Pearson Dental, supra, 48 Cal.4th at p. 673–675.) Further, the
error was subject to judicial review: “Here, as a result of the
arbitrator’s clear legal error, plaintiff’s claim was incorrectly
determined to be time-barred. Indeed, the legal error
misconstrued the procedural framework under which the parties
agreed the arbitration was to be conducted, rather than
misinterpreting the law governing the claim itself. [Footnote
omitted.] It is difficult to imagine a more paradigmatic example
of when ‘granting finality to an arbitrator’s decision would be
inconsistent with the protection of a party’s statutory rights’
(Moncharsh, supra, 3 Cal.4th at p. 32) than the present case, in
which, as a result of allowing the procedural error to stand, and
through no fault of the employee or his attorney, the employee
will be unable to receive a hearing on the merits of his FEHA
claims in any forum.” (Id. at pp. 679–680.)
Considered together, Round Valley and Pearson Dental
stand for the proposition that where an arbitrator’s decision has
the effect of violating a party’s statutory rights or well-defined
17
public policies—particularly those rights and policies governing
the conduct of the arbitration itself—that decision is subject to
being vacated or corrected. With this framework in mind, we
now consider Sargon’s claim of error.
III.
The Arbitrator’s Damages Award Violated
Sargon’s Statutory Right to Initiate
Litigation in Court
A. The California Arbitration Act
As pertinent here, “ ‘ “[t]he constitutional right to petition
. . . includes the basic act of filing litigation or otherwise seeking
administrative action.” ’ ” (Briggs v. Eden Council for Hope &
Opportunity (1999) 19 Cal. 4th 1106, 1115; see also Cal. Const.,
art. 1, § 3(a).) The right of petition in the context of private
agreements to arbitrate is set out in the Act, which “represents a
comprehensive statutory scheme regulating private arbitration in
this state. [Citation.]” (Moncharsh, supra, 3 Cal.4th at p. 9.)
“The fundamental premise of the [arbitration] scheme is
that ‘[a] written agreement to submit [either a present or a future
controversy] to arbitration . . . is valid, enforceable and
irrevocable, save upon such grounds as exist for the revocation of
any contract.’ (Code Civ. Proc., § 1281.) [Footnote omitted.] The
statutes set forth procedures for the enforcement of agreements
to arbitrate (id., §§ 1281.2–1281.95), establish rules for the
conduct of arbitration proceedings except as the parties otherwise
agree (id., §§ 1282–1284.2), describe the circumstances in which
arbitrators’ awards may be judicially vacated, corrected,
confirmed, and enforced (id., §§ 1285–1288.8), and specify where,
when, and how court proceedings relating to arbitration matters
18
shall occur (id., §§ 1290–1294.2).” (Vandenberg v. Superior Court
(1999) 21 Cal. 4th 815, 830.)
As relevant to BGR’s breach of contract claim, the Act
provides that “[i]f a controversy referable to arbitration under an
alleged agreement is involved in an action or proceeding pending
in a superior court,” a party may file a petition for an order to
arbitrate in lieu of an answer to the complaint. (§§ 1292.4,
1281.7.) If a petition is filed, the superior court “shall order the
petitioner and the respondent to arbitrate the controversy” if the
court determines that an agreement to arbitrate the controversy
exists, unless it finds that the right to compel arbitration has
been waived, or grounds exist for the revocation of the
agreement, or a party to the arbitration agreement is also a party
to a pending court action with a third party arising out of the
same transaction and there is a possibility of conflicting rulings.
(§ 1281.2.)
The Act thus anticipates that a party to an arbitration
agreement may file a lawsuit in court, and it describes the
procedural vehicles through which the opposing party may
respond—i.e., it may file either an answer to the complaint or a
section 1281.2 petition to compel. The Act also prescribes the
remedy the court must order if any party demands arbitration of
an arbitrable dispute that is the subject of a lawsuit—specific
performance of the arbitration agreement, not a damages award
for breach of contract. (See, e.g., Espejo v. Southern California
Permanente Medical Group (2016) 246 Cal. App. 4th 1047, 1057
[“A petition to compel arbitration is a suit in equity seeking
specific performance of an arbitration agreement.”].)
Significantly for our purposes, the Act separately provides
that a party may challenge the enforceability of an arbitration
19
agreement in court without forfeiting the right to arbitrate
should the challenge to the arbitration agreement be
unsuccessful. Specifically, section 1281.12 says: “If an
arbitration agreement requires that arbitration of a controversy
be demanded or initiated by a party to the arbitration agreement
within a period of time, the commencement of a civil action by
that party based upon that controversy, within that period of
time, shall toll the applicable time limitations contained in the
arbitration agreement with respect to that controversy, from the
date the civil action is commenced until 30 days after a final
determination by the court that the party is required to arbitrate
the controversy, or 30 days after the final termination of the civil
action that was commenced and initiated the tolling, whichever
date occurs first.” (Italics added.)
The Act thus recognizes that a party to an arbitration
agreement may elect to initiate a civil action, rather than an
arbitration proceeding, and it specifically protects the party’s
right to do. Our Supreme Court recently explained why the
Legislature wrote such protection into the Act: “According to its
legislative history, [section 1281.12] prevents ‘parties from being
either forced to abide by arbitration agreements of dubious
validity instead of seeking court evaluation, initiating costly and
duplicative proceedings, or being unfairly deprived of any forum
for resolution of the dispute. Supporters observe that there are
many legitimate reasons why a party might file a lawsuit in court,
rather than demanding or pursuing arbitration. Among these are
the following: (1) the plaintiff may believe the claims are not
subject to arbitration because the arbitration agreement is
unenforceable on grounds of unconscionability or similar
concepts; (2) there may be a dispute about whether the particular
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claims at issue do or do not fall within the scope of an arbitration
agreement; (3) the plaintiff may contend that one or more of the
statutory grounds for denying a petition to compel arbitration set
forth in Code of Civil Procedure section 1281.2 exist, assuming
the defendant does file a petition to compel arbitration in
response to the plaintiff’s filing of the lawsuit; (4) the plaintiff
may prefer a court trial or jury trial and simply be hopeful that
the defendant will not assert any right to arbitrate the claims, for
whatever reason [indeed, the defendant may decide that it
prefers a court proceeding as well]; and (5) the plaintiff might not
even be aware that there is an arbitration agreement governing
the controversy.’ (Assem. Com. on Judiciary, Analysis of Assem.
Bill No. 1553 (2005–2006 Reg. Sess.) for hearing Apr. 5, 2005,
p. 3, underlining and extra capitalization omitted.)” (Pearson
Dental, supra, 48 Cal.4th at pp. 673–674, italics added.)
B. The California Arbitration Act Preserves the Right of
Parties to an Arbitration Agreement to Initiate
Litigation in Court
The courts have relied on the statutory provisions described
above to hold that even where a party has entered into an
arbitration agreement, that party may file a complaint in
superior court seeking resolution of a dispute potentially subject
to the arbitration agreement. In Brock v. Kaiser Foundation
Hospitals (1992) 10 Cal. App. 4th 1790, 1795–1796 (Brock), the
court explained: “A party to a contractual arbitration agreement
may compel a recalcitrant party to comply with a valid
agreement by means of a petition pursuant to section 1281.2,
which is in essence a suit in equity to compel specific performance
of the arbitration agreement. [Footnote omitted.] [Citation.] [¶]
But as this court recognized long ago, contractual arbitration is
21
in no sense . . . a usurpation or ouster of the judicial power vested
in the trial court of this state by our Constitution. (Snyder v.
Superior Court (1937) 24 Cal. App. 2d 263, 267.) As a result, there
is nothing to prevent one of the parties to a contractual arbitration
provision from resorting initially to an action at law. (Spence v.
Omnibus Industries (1975) 44 Cal. App. 3d 970, 975 [(Spence)];
Ross v. Blanchard (1967) 251 Cal. App. 2d 739, 742–743.) The
other party, if determined to pursue arbitration, must then take
action to compel arbitration. (Spence, supra, 44 Cal.App.3d at
p. 975.) ‘A right to compel arbitration is not . . . self-executing. If
a party wishes to compel arbitration, he must take active and
decided steps to secure that right, and is required to go to the
court where the [other party]’s action [at law] lies.’ (Gunderson v.
Superior Court (1975) 46 Cal. App. 3d 138, 143.) Consequently,
the party seeking to enforce the contractual arbitration clause
must file the section 1281.2 petition in the action at law (or raise
it as an affirmative defense in the answer) or else the right to
contractual arbitration is waived.” (Italics added; see also Dial
800 v. Fesbinder (2004) 118 Cal. App. 4th 32, 44–45 [quoting
Brock].)
The court similarly described the effect of an arbitration
agreement on the rights of parties to pursue civil litigation in
Spence, supra, 44 Cal.App.3d at p. 975: “Plaintiffs initially
waived arbitration by filing a suit in the superior court on the
basic contract without seeking arbitration. [Citations.] This was
their prerogative. A provision for arbitration does not divest the
court of jurisdiction to hear the controversy. It merely means
that if one of the parties chooses arbitration, he may so petition
the court and the court will stay proceedings, order arbitration,
then confirm the award. (Code Civ. Proc., § 1280 et seq.) But
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lacking a request for arbitration, the courts stand ready, willing
and able to decide controversies between the parties even though a
provision for arbitration exists.” (Italics added.)
And in Ross v. Blanchard (1967) 251 Cal. App. 2d 739, 742,
the court said as follows: “Our own reading of California’s
arbitration statute and the cases interpreting it convinces us that
a contract to arbitrate by no means precludes a party to the
contract from initially resorting to the courts. . . . [¶] . . . [¶]
From [section 1281.4] and other sections of the statute, both
directly and by implication, it is apparent, [¶] 1. either party may
demand arbitration and both may waive it [citation]; [¶] 2. a
party may be estopped to demand arbitration; [¶] 3. the
particular issue in controversy may not fall within the terms of
the arbitration agreement [citation]; [¶] 4. an agreement to
arbitrate is an affirmative defense [citations].” (Italics added.)
C. Sargon’s Claim That the Arbitrator Exceeded His
Powers By Entering a Breach of Contract Award Is
Subject to Judicial Review
Taken together, the authorities discussed above lead us to
conclude that an arbitration agreement requires a party to
submit a dispute to arbitration if ordered by a court to do so—but
it does not preclude a party from initiating a civil action or asking
a court to resolve disputed issues over an arbitration agreement’s
applicability or enforceability. To the contrary, the Act expressly
protects a party’s right to do so.
In the present case, therefore, none of Sargon’s actions
breached the arbitration provisions of the retainer agreement.
The retainer agreement contained a garden-variety arbitration
clause, requiring the parties to submit to arbitration “[a]ny and
all disputes, claims, or proceedings between you and BWG.” As
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we have said, such a provision is not self-executing and does not
preclude a party from commencing an action in the superior
court. Nor does an arbitration provision prohibit a party from
filing opposition to a petition to compel arbitration in order to
urge that the arbitration agreement does not bind it, or is
unenforceable, or is inapplicable to the parties’ dispute.
Sargon’s initiation of its malpractice lawsuit in superior
court, therefore, was entirely consistent with the arbitration
agreement. Under that agreement, and pursuant to California
law, Sargon was permitted both to file a complaint in superior
court and to oppose BGR’s petition to compel arbitration. Only
after the superior court ordered it to submit to arbitration was it
required to do so. The arbitrator thus erred when he concluded
that Sargon committed an actionable breach of the arbitration
agreement by “fil[ing] a malpractice claim against BGR in the
Los Angeles Superior Court” and refusing to “voluntarily dismiss
its lawsuit and submit its claims in arbitration.”4
4 Citing Tiri v. Lucky Chances, Inc. (2014) 226 Cal. App. 4th
231, 241 (Tiri), BGR urges that parties to an arbitration
agreement may choose to delegate questions of arbitrability to
the arbitrator, and that the parties did so here. BGR is correct
only in part. Although parties to an arbitration agreement may
agree to delegate questions of arbitrability to the arbitrator, it is
the court, not the arbitrator, that must decide the “threshold
issue” of “ ‘the validity . . . of the precise agreement to arbitrate at
issue . . . before ordering compliance with that agreement. . . .’
(Rent-A-Center[, West, Inc. v. Jackson (2010)] 561 U.S. [63],
71 [(Rent-A-Center)].)” (Tiri, supra, at p. 241, fn. 4.) The reason
for this rule is clear: “Delegation clauses have the potential to
create problems of circularity. For example, suppose an
arbitration agreement delegates the issue of enforceability to the
arbitrator. If the arbitrator concludes that the arbitration
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Further, the arbitrator’s error had the effect of depriving
Sargon of a statutory right—namely, the right pursuant to the
Act (as articulated in sections 1281, 1281.12, 1281.2, and 1292.4)
to test in court the validity and enforceability of an arbitration
agreement before submitting to arbitration. (See Round Valley,
supra, 13 Cal.4th at pp. 287–288; Pearson Dental, supra,
48 Cal.4th at p. 681.) And, as in Pearson Dental, “[i]t is difficult
to imagine a more paradigmatic example of when ‘granting
finality to an arbitrator’s decision would be inconsistent with the
protection of a party’s statutory rights’ ” (Pearson Dental, supra,
48 Cal.4th at p. 680) than the present case, in which Sargon
suffered the entry of a $200,000 damages award against it for
taking an action specifically authorized by the arbitration
statute—that is, challenging the validity of an arbitration
agreement in court—in precisely the manner the statute permits.
Therefore, notwithstanding the limited judicial review generally
afforded arbitration awards, the present arbitration award is
subject to our judicial review.5
agreement is, in fact, not enforceable, this would mean that the
entire agreement, including the delegation clause, is
unenforceable—a finding that would undermine the arbitrator’s
jurisdiction to make that finding in the first place.” (Malone v.
Superior Court (2014) 226 Cal. App. 4th 1551, 1559.) Thus, even
where the parties purport to delegate issues of arbitrability to the
arbitrator, the court must determine whether the delegation
provision is enforceable before ordering the parties to arbitration.
(E.g., Rent-A-Center, supra, 561 U.S. at pp. 69–70.)
5 Having so concluded, we do not consider Sargon’s
alternative grounds for vacating the arbitration award.
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IV.
The Proper Course Is to Correct, Rather Than
to Vacate, the Arbitration Award
Having concluded that the arbitrator made an error of law
that is subject to judicial review, we turn to the final issue before
us: whether the error requires that the award be vacated in full
or merely corrected.6
If parties to an arbitration award petition to confirm or
correct the award, the court must take one of three actions: It
must either (1) confirm the award, (2) vacate the award in its
entirety, or (3) “correct[] the award and confirm[] it as corrected.”
(§ 1286.) A court may “correct the award and confirm it as
corrected if the court determines that: [¶] . . . [¶] . . . The
arbitrator[] exceeded [his] powers but the award may be corrected
without affecting the merits of the decision upon the controversy
submitted. . . .” (§ 1286.6, subd. (b).)
Where a part of an arbitration award cannot be confirmed
due to the arbitrator’s error of law, the award may be corrected
by striking the erroneous part if doing so does not affect the
merits of the part that remains. Thus, for example, in Jones v.
Humanscale Corp., supra, 130 Cal. App. 4th 401, the Court of
Appeal determined that an arbitrator properly upheld a covenant
not to compete entered into between a former employer and
employee, but erred in ordering the arbitrator’s administrative
6 Although neither party filed a petition to correct the award,
we have the power to correct sua sponte because “[a] petition or
response requesting that the award be vacated has been duly
served and filed and; [¶] . . . All petitioners and respondents are
before the court. . . .” (§ 1286.8, subd. (b)(1); see also Jones v.
Humanscale Corp. (2005) 130 Cal. App. 4th 401, 412.)
26
fees and compensation to be split equally between the employer
and employee. Because the correction of the award’s division of
arbitration fees and expenses would “not affect the arbitrator’s
findings on the merits of the substantive issues,” the trial court
“had authority to correct the arbitration award and should have
exercised its power to do so rather than vacating the entire award
because of the erroneous division of the arbitration fees and
expenses.” (Id. at p. 412, italics added.)
Similarly, in Ling v. P.F. Chang’s China Bistro, Inc. supra,
245 Cal. App. 4th 1242, the Court of Appeal concluded that the
arbitrator exceeded his power by awarding statutory attorney
fees to a defendant employer who defeated an employee’s Labor
Code claims. However, the court rejected the plaintiff employee’s
claim that the error required the trial court to vacate the entire
award: “[T]he trial court correctly noted that it had no authority
to upset the arbitrator’s rulings on the merits of plaintiff’s
overtime and missed meal periods claims—rulings unreviewable
under the Act. [Citation.] Vacatur of the award in its entirety
under Code of Civil Procedure section 1286.2 would have defeated
the finality of those rulings and undermined the Act’s purpose to
resolve disputes efficiently and conclusively.” (Id. at p. 1259.)
In the present case, BGR’s breach of contract claim against
Sargon, and Sargon’s legal malpractice claim against BGR, are
based on separate and distinct facts and legal theories.
Therefore, the portion of the arbitration award adjudicating
BGR’s breach of contract claim can be stricken without affecting
the merits of the arbitrator’s summary disposition of Sargon’s
malpractice claim. For this reason, and because further
adjudication of the legal malpractice claim before a new
arbitrator would undermine the Act’s purpose of conclusively
27
resolving disputes, the proper course is to correct, rather than to
vacate, the arbitration award.
DISPOSITION
The judgment and order granting the petition to confirm
the arbitration award are reversed insofar as they award contract
damages to BGR, and otherwise are affirmed. The matter is
remanded to the superior court with directions (1) to correct the
award by striking the portion that found Sargon breached the
contract and ordered Sargon to pay damages to BGR, and (2) to
enter judgment on the corrected award. The parties shall bear
their own costs on appeal.
CERTIFIED FOR PUBLICATION
EDMON, P. J.
We concur:
LAVIN, J.
JOHNSON, (MICHAEL) J.*
*
Judge of the Los Angeles Superior Court, assigned by the
Chief Justice pursuant to article VI, section 6 of the California
Constitution.
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