WFP Securities v. Davis CA2/7 ( 2014 )

Filed 4/15/14 WFP Securities v. Davis CA2/7
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication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.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
WFP SECURITIES, INC. et al., B244528
Plaintiffs and Respondents, (Los Angeles County
Super. Ct. No. BS136533)
v.
JAIMIE DAVIS,
Defendant and Appellant.
APPEAL from an order of the Superior Court of Los Angeles County, Richard L.
Fruin, Jr., Judge. Affirmed.
Law Offices of Melinda Jane Steuer and Melinda Jane Steuer for Defendant and
Appellant.
Winget Spadafora & Schwartzberg, Brandon S. Reif, David Maurer, and Shanna
Javaheri for Plaintiffs and Respondents.
____________________
INTRODUCTION
Appellant Jaimie Davis filed an arbitration against respondents WFP Securities,
Inc. (WFP), John Evan Schooler, and Curtis J. Sathre, II, seeking to recover money she
lost in bad investments they had recommended. The arbitration did not go well for her.
The rulings by the three arbitrators who heard her claim were sometimes inconsistent,
sometimes unaccompanied by an explanation, and ultimately adverse to her claims. If
you bargain for and agree to arbitration, however, you get arbitration, and sometimes the
kind of arbitration experience Davis had.
Davis now appeals from an order confirming the arbitration award in favor of
WFP, Schooler, and Sathre, expunging all references to the arbitration from Schooler’s
and Sathre’s records, and denying Davis’ petition to vacate the award. Davis contends
the award must be vacated due to erroneous exclusion of expert testimony and witness
intimidation. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
A. The Arbitration
1. Davis’ Statement of Claim
Davis initiated arbitration proceedings against respondents before the Financial
Industry Regulatory Authority (FINRA).1 WFP is a member of FINRA. Schooler is
WFP’s president, and Sathre is a registered representative with WFP.
In her claim, Davis alleged that she was 38 years old and invested almost her
entire net worth with respondents. Respondents sold her certain investments,
1 “In 2007 the National Association of Securities Dealers, Inc. (NASD), and the
member regulation, enforcement and arbitration operations of the New York Stock
Exchange merged to form FINRA. [Citation.]” (Lickiss v. Financial Industry Regulatory
Authority (2012) 208 Cal. App. 4th 1125, 1128, fn. 2.)
2
representing that they were safe, income-producing investments. In fact, the investments
were unsafe and fraudulent. Had respondents acted with due diligence, they would have
discovered the fraud and would have disclosed that information to Davis.
Davis further alleged that respondents placed over $1 million of her money in
speculative, illiquid real estate and oil and gas investments, again misrepresenting them
as safe, income-producing investments. Davis retired based on respondents’ false
representations regarding the income these investments would produce.
Davis also alleged that respondents were negligent in recommending and selling
these investments to her, violated the duties they owed to her, and were motivated by
their personal financial interests. As a result, Davis lost much of the money she had
invested. She sought to recover from respondents compensatory damages of more than
$2 million, plus punitive damages.
2. Respondents’ Answer
In their answer, respondents alleged that Davis had a degree in finance, was a
licensed real estate broker and experienced real estate investor, and was a knowledgeable
investor who represented that she was able to evaluate investment risk. She was seeking
to invest in alternatives to stock, bond, and mutual fund investments, such as investments
in real estate and oil and gas. A friend of Davis who was satisfied with Sathre’s services
referred her to Sathre. Before investing with Sathre, Davis asked questions about the
investments and represented that she had read the private placement memoranda or
prospectuses describing the investments. During the course of her five-year professional
relationship with Sathre, Davis indicated she was satisfied with his services, often
reinvested investment proceeds in products he recommended, and referred new clients to
him. The relationship changed only after the global financial crisis.
Respondents further alleged that they acted with due diligence in recommending
investments to Davis and that the investments were suitable. Davis acknowledged the
risks involved in making these investments after reading the private placement
memoranda. Problems with some of the investments only surfaced after the economy
3
suffered a financial crisis, and respondents were not responsible for that crisis.
Respondents also asserted a number of affirmative defenses, including ratification,
equitable defenses, and statute of limitations.
3. Expert Witness Douglas J. Schulz
The arbitration proceeded before a panel of three arbitrators. Two of them,
Thomas R. Watkins, the chair of the panel, and Judith Porter, were public arbitrators.
The third arbitrator, Gerald C. Tambe, was a non-public arbitrator.2
Davis listed Douglas J. Schulz as a witness on her witness list. Schulz is
president of his company and provides professional money management services.
According to his curriculum vitae, which Davis submitted as an exhibit, Schulz is a
securities consultant who testifies regularly as an expert witness in federal and state
courts. Parties retain him to testify about “rules, laws and regulations of the securities
industry; norms and guidelines of brokerage firms; suitability of investments and
investment strategies; order execution; evaluation of various investments; damage
theories; supervision and compliance.” He was previously licensed with the Securities
and Exchange Commission and is currently licensed as a Registered Investment Advisor.
At an evidentiary hearing on Monday, October 3, 2011 counsel for respondents,
Brandon S. Reif, noted that there had been discovery orders for the production of
documents, some of which pertained to Schulz, and that Reif had not received them until
the previous weekend. Reif stated that he had not had an opportunity to review the
documents and wanted the arbitrators to exclude them. Counsel for Davis, William J.
2 Public arbitrators are unattached to the securities industries while non-public
arbitrators have experience in the securities industry. (STMictroelectronics, N.V. v.
Credit Suisse Securities (USA) LLC (2d. Cir. 2011) 648 F.3d 68, 72; see Stone v. Bear,
Stearns & Co., Inc. (E.D. Pa. 2012) 872 F. Supp. 2d 435, 439 [“the general gist” of the
FINRA rules is that “public arbitrators should not be too closely tied to the securities
industry, while non-public arbitrators should have significant securities-related
experience”].)
4
Brown, Jr., explained that he had misplaced some of the documents in his office and he
had not received other documents until the weekend. When Watkins asked Brown about
evidence suggesting that Brown had possession of some the documents in August 2011,
Brown repeated that he was unaware the documents were in his office, denied there was
“some sort of sandbag,” and stated that he sent them to Reif as soon as he had discovered
and reviewed them.
Watkins responded that he did not think Brown was trying to sandbag anyone, but
stated: “I understand Mr. Reif’s concern. I understand your position with respect to how
you received them and you got them over. I think that should be acceptable.” Reif
stated, “That’s fine.” Watkins continued: “So we can just move on. I don’t think they
were trying to do anything intentionally to cause [respondents] not to receive the
documents in a timely manner according to what Mr. Brown’s statement is. I think that
that’s acceptable. I think we can just go forward now. Whether you’re ready or not,
that’s a choice you will make. I’m not sure how important they are to you at this point
given what you have already received and other things you may have been requesting.”
Reif pointed out that they were not dealing with voluntary production of documents but a
discovery order. Watkins stated that he wanted to move forward with the hearing, and
“[i]f there’s anything that we need to resolve, we’ll resolve it.”
At the arbitration hearing the next day, October 4, 2011, Brown questioned Schulz
about his qualifications, including his education, licensing, and experience. Schulz stated
that he had “testified over 600 times under oath,” in arbitrations, depositions, and in
court. He had “testified on . . . the gamut of investing and securities rules and
regulations.”
With the panel’s permission, Reif conducted a voir dire examination of Schulz.
Reif asked Schulz how long it had been since he worked in the brokerage industry,
whether he had sold products such as those involved in the arbitration, and about his
licensing and experience. Reif also questioned Schulz about his involvement in other
cases, his publications, and other aspects of his professional life.
5
Following the voir dire examination, Reif moved to exclude Schulz as an expert
on the grounds “[h]e’s got no relevant experience in the area of the brokerage industry to
testify as an expert in this case, his NASD licenses are outdated. He hasn’t been in the
retail business for over 20 years . . . .” Reif also argued that Schulz had “never been a
compliance officer in the brokerage industry. He’s never supervised a registered
representative and he’s unqualified therefore to testify about supervision.” There also
was no evidence Schulz “ever conducted due diligence on any of the products that are at
issue here or any products that are similar to the ones at issue here. Clearly based on his
prior testimony representing just the claimants and the investing public, publishing a
book on how to sue brokers, he’s clearly biased.” Reif added that “based on the
disqualifications [as an expert witness in other cases], deemed untrustworthiness and
withdrawal of prior opinions in the securities industry and one of the banking industry,
that he’s not an expert for purposes of this case and he shouldn’t be allowed to provide
expert testimony in this matter.”
Brown opposed the motion, noting that Schulz had been qualified as an expert in
600 cases and that “[t]he other side was able to point out [only] a handful of cases in
which his opinions were explicitly not accepted or somebody tried to exclude him as a
witness.” In addition, Brown argued that Reif was objecting to the content of Schulz’s
testimony rather than his qualifications as an expert witness. Brown concluded: “This
witness is clearly very qualified. He’s got a great deal of expertise in this area and his
opinions are going to be helpful to the triers of fact in deciding what happened in this
case in determining this case. I think that this is indicative of the no holds barred
approach that’s been applied to every aspect of this case that we’ve seen so far. We’ve
seen it throughout. I’m not the least bit surprised that we’re seeing it with respect to our
expert. I think that the motion should be summarily denied and we can move onto the
testimony . . . .”
Following a brief recess and an “executive session” to consider the motion to
exclude Schulz, the arbitration panel announced that it “unanimously decid[ed] to grant
the motion.” Brown disagreed with the ruling and asked the panel to reconsider because
6
the ruling would “throw this whole process completely off and I think it’s against the
principles of FINRA to do that.” Watkins responded that the panel members were “not
going into lengthy explanation of why we made the decision. We did that. That’s why
we went into executive session. We considered the things that you mentioned with
respect to Ms. Davis’ opportunity to put on her case in chief, as well as Respondent[s’].
We always look at both sides.” Watkins explained further that the panel considered how
its ruling would affect both sides, but the ruling would stand and there was “nothing else
we can do on this matter at this point.”
Brown continued his objections, claiming the ruling was prejudicial and shocking.
When Watkins said again that the ruling would stand, Brown asked: “So is it clear that
the panel is not going to describe the grounds for its ruling, Mr. Chairman? We would
like at least that much on the record if that’s what’s the case.” Watkins responded, “It’s
not debatable. We’re not writing or we’re not providing a written reason or a stated
reason with respect to what we decided on, otherwise, that’s why I didn’t give you other
specific information with respect to what we were considering other than what was raised
in the motion. That’s it. We did give it the full consideration.”
4. Witness Robert Phalen
Davis also listed Robert Phalen as a witness. Phalen was another customer of
WFP who had lost money in similar investments and then brought an arbitration claim
against WFP. Brown apparently intended to call Phalen to testify about his experiences
and losses.3 Brown reported to the arbitrators, however, that Phalen “said he’s been
3 It is not clear from the record whether Brown made this offer of proof to the
arbitrators. Davis’ witness list included Phalen as one of 41 witnesses she intended to
call but did not describe the subject matter of his testimony. The excerpt of the
arbitration transcript included in appellant’s appendix does not disclose why Davis
wanted to call Phalen or what his testimony would be. The evidence about Phalen and
his testimony is contained in the declaration Brown submitted to the trial court in support
of Davis’ motion to vacate the arbitration award.
7
threatened with litigation if he testifies and so he has told us that he’s not going to come
and testify in spite of the subpoena. So we’ll probably move on to [another witness] in
the morning.” Reif responded that Phalen “has not been threatened in any way. He has a
document that prohibited him from doing certain activities and he’s been warned that if
he violates his contract, his agreement, then yes, he could be sued. He was proceeding
without counsel speaking with the adversary, but not speaking with me. So he hasn’t
been threatened in any manner. To that accusation, that’s hearsay, self-serving and it’s
disputed.”
5. The Arbitration Award
The arbitrators ruled for respondents. In their award, however, the arbitrators gave
a different reason for excluding Schulz than the reason they had indicated at the hearing.
At the hearing, the arbitrators granted respondents’ motion to exclude Schulz as
unqualified and ruled that he would “not be accepted as an expert witness in this matter.”
In the award, the arbitrators stated that they had “unanimously dismissed” Schulz “in
accordance with FINRA Code of Arbitration Procedure . . . Rule 12212(a) for [Davis’]
non-compliance with the Panel’s Discovery Orders on March 16, 2011 and April 25,
2011, and the Panel’s Order to produce subpoenaed documents from [Davis’] expert
witness issued on July 11, 2011. The Panel found that [Davis] and Mr. Schulz obstructed
the evidentiary hearings when [Davis] was non-responsive to the Panel’s written
warnings on June 10, 15 and 23, 2011 and July 12, 2011, and the Panel’s oral warnings at
the hearing on July 18, 2011 and October 3, 2011. [Davis’] non-compliance prejudiced
Respondents’ preparation of their case-in-chief.”4 The arbitration award did not mention
Phalen.
On the merits of Davis’ claim, “[t]he Panel found that [Davis] ultimately asserted
the following causes of action: 1) failure to treat [Davis] in a just and equitable manner;
4 The arbitrators probably meant that respondents were prejudiced in the preparation
of their defense, not their case-in-chief, because Schulz was a witness for Davis.
8
2) breach of contract; 3) breach of fiduciary duty; 4) negligence, negligent
misrepresentations, and omissions; 5) violation of California Corporations Code;
6) control person liability; 7) failure to supervise; and 8) unsuitable investments. These
allegations and the causes of action alleged in [Davis’] Statement of Claim emanate from
[Davis’] investment in products covered by Regulation D and other private placement
programs. [Davis] brought this arbitration to recover losses she suffered as a result of
Respondents’ alleged misconduct associated with the recommendations and sales of
alleged fraudulent investment products that are alleged to have been Ponzi schemes. The
Panel unanimously found that [Davis] failed to prove by a preponderance of [the]
evidence any of the causes of action[] or allegations alleged in the Statement of Claim.
Therefore, [Davis’] Statement of Claim is dismissed in its entirety.” The arbitrators also
found that “[u]nder any of these potentially applicable statutes of limitations, [Davis’]
claims are barred as a matter of law.” Finally, the arbitrators found that Davis had filed
duplicative claims in other forums, and it was “highly likely” that she was seeking double
recovery on her claims. Her “actions protracted the FINRA Dispute Resolution
arbitration proceedings and enhanced the costs and fees of Respondents. [Her] actions
are in direct violation of FINRA Code Rule 12209.”
The arbitrators ordered Davis to pay respondents $135,755.89 for costs and expert
witness fees. They also split the arbitration fees of just over $42,000 approximately
evenly between Davis and respondents.
B. The Petitions To Confirm and Vacate
1. The Petitions
Respondents filed a petition to confirm the arbitration award, and Davis filed a
petition to vacate it. (See Code Civ. Proc., §§ 1285, 1286.2.)5 Of the six grounds listed
5 All further section references are to the Code of Civil Procedure unless otherwise
stated.
9
in section 1286.2, subdivision (a),6 Davis based her petition to vacate the award on the
first and fifth grounds: that respondents procured the award “by corruption, fraud, or
other undue means” (§ 1286.2, subd. (a)(1)) and that the arbitrators refused “to hear
evidence material to the controversy” (§ 1286.2, subd. (a)(5)). Davis claimed the award
should be vacated based on the arbitrators’ exclusion of Schulz’s testimony and “because
WFP prevented the testimony of a crucial impeachment witness through threats and
intimidation.”
Davis submitted a declaration by her new attorney, Melinda Jane Steuer, attaching
as an exhibit a “rough outline” of what Schulz’s testimony at the arbitration would have
been. Respondents filed evidentiary objections to Steuer’s declaration and the attached
exhibit. Respondents also noted that “[t]he outline reads as a series of random references
to citations, argument and statements by the author which, incidentally, purport to weigh
testimony . . . . At bottom, this outline, as entertaining as it is—is not a substitute for a
properly authenticated and admissible declaration under penalty of perjury.” (Emphasis
omitted.)
6 Section 1286.2, subdivision (a), provides that “the court shall vacate the award if
the court determines any of the following:
“(1) The award was procured by corruption, fraud or other undue means.
“(2) There was corruption in any of the arbitrators.
“(3) The rights of the party were substantially prejudiced by misconduct of a
neutral arbitrator.
“(4) The arbitrators exceeded their powers and the award cannot be corrected
without affecting the merits of the decision upon the controversy submitted.
“(5) The rights of the party were substantially prejudiced by the refusal of the
arbitrators to postpone the hearing upon sufficient cause being shown therefor or by the
refusal of the arbitrators to hear evidence material to the controversy or by other conduct
of the arbitrators contrary to the provisions of this title.
“(6) An arbitrator making the award either: (A) failed to disclose within the time
required for disclosure a ground for disqualification of which the arbitrator was then
aware; or (B) was subject to disqualification upon grounds specified in Section 1281.91
but failed upon receipt of timely demand to disqualify himself or herself as required by
that provision. . . .”
10
Davis also submitted a declaration from Phalen. Phalen stated that he had invested
with Sathre and WFP and had subsequently learned that many of the companies he
invested in were Ponzi schemes and scams. He had filed a civil suit and an arbitration
proceeding against WFP, which were resolved in a settlement agreement with a
confidentiality provision.
Phalen stated that he received a subpoena to testify in Davis’ arbitration and that
Brown subsequently contacted him about testifying. Brown “explained [to Phalen] that it
would be a great help to Ms. Davis’ case if I would testify as a witness and describe my
interactions with Mr. Sathre and WFP Securities Inc. without mentioning anything about
[my] case’s resolution.” Phalen contacted his attorney, Robert A. Uhl, and “learned that
Mr. Sathre and WFP Securities Inc., through their counsel, had threatened to sue me if I
testified in Ms. Davis’ case.” Phalen then contacted Brown, who said “he had heard the
same threat directly from counsel for Mr. Sathre and WFP Securities Inc.” and that
counsel for WFP “had threatened to take action against him as well as against me for
calling me as a witness.” Phalen “reluctantly gave in to the intimidation” and declined to
testify for Davis.
Brown stated in his declaration that he had intended to call Phalen to testify about
“his experience as a customer of WFP; his interaction with the respondents in the WFP
arbitration; representations that had been made to him by respondents; the investments he
made and the losses he suffered; and the claims he had made and settled with WFP.”
Phalen initially told Brown that he would testify at the arbitration and later said that even
though his attorney had instructed him not to appear he was going to appear anyway,
“because he felt strongly about testifying in support of Ms. Davis.” The day before he
was scheduled to testify, however, Phalen told Brown that he would not testify because
Reif had told him that if he “appeared at the hearing and testified [he] would be sued by
WFP regardless of what [his] testimony was.” Brown also stated that, during a break in
the arbitration proceedings, he spoke with Reif about “whether there was an agreement
we could reach on the scope or confidentiality of Mr. Phalen’s testimony so that Mr.
Phalen could testify without threat of a suit from respondents. Mr. Reif stated that based
11
on the settlement agreement between his clients and Mr. Phalen that Mr. Phalen would be
subject to suit if he appeared. Mr. Reif stated that he believed that Mr. Phalen merely
discussing with me the possibility of complying with the FINRA subpoena to testify was
probably already basis for a suit and that Mr. Reif’s clients fully intended to sue Mr.
Phalen.”
Reif stated in his declaration in opposition to Davis’ petition to vacate the
arbitration award that he sent a letter to Uhl regarding the “Confidentiality and Non-
Disparagement” provisions of Phalen’s settlement agreement with WFP. Reif never
spoke directly to Phalen on Uhl’s instructions. Reif also advised Brown that he would
recommend that respondents enforce the provisions of the confidential settlement
agreement. Reif did not believe that Brown had any personal knowledge of the terms of
that settlement agreement. Reif added that Brown never asked the arbitration panel to
issue an order compelling Phalen to testify.
2. The Rulings on the Petitions
At the hearing on the petitions to confirm and vacate, Steuer stressed that the panel
did not inform Davis and her attorney at the arbitration hearing of the reason the panel
excluded Schulz. Steuer also pointed out that at the arbitration hearing the previous day
the panel apparently had accepted Brown’s explanation for the late production of
documents and suggested that Davis had cured the discovery violations. Steuer argued
that Davis therefore had no reason to believe there was any issue about the production of
documents. Steuer also argued that Schulz’s testimony was material and its exclusion
prejudicial, because Davis could not prove professional negligence without expert
testimony. Reif responded that because “there was no proffer made for what [Schulz]
would have said,” “[t]here cannot be an argument that anything he would have said
would be material.” Reif also told the court that Schulz had refused to comply with a
document subpoena. When Schulz did comply, he only produced a “small sample” of the
documents subpoenaed.
12
With respect to Phalen, Steuer argued that “[t]he fact that he still could have
testified . . . under an asserted privilege does not change the fact that he was basically
intimidated into [not] testifying which is unlawful conduct.” She added that “[h]aving
somebody else who can come in [as] an investor with the same broker and say he told me
it was safe[, h]e told me there were no risks is really powerful and it’s really important.”
Reif responded that Phalen was bound by confidentiality agreements and that “there was
no intimidation or coercion. There was a contract that he had to abide by and it did not
prohibit him from testifying. . . . It prohibited him from breaching confidentiality and
disparaging the people that signed the agreements . . . . If Mr. [Phalen’s] testimony was
so critical . . . the underlying counsel for Ms. Davis should have presented him at the
hearing, let him say I cannot answer these questions unless there’s an order from the
panel. Then there’s an order and then he’s not subject to suit for any breach of
confidentiality or non-disparagement.”
The trial court granted respondents’ petition to confirm the award and denied
Davis’ petition to vacate it, although the court confused the grounds of Davis’ petition.
The court erroneously stated that Davis was relying on the third ground for vacating an
arbitration award, substantial prejudice by misconduct of the arbitrators affecting her
substantial rights pursuant to subdivision (a)(3) of section 1286.2, when Davis’ petition
actually stated that she was seeking to vacate the arbitration award based on the first and
fifth grounds that the award was obtained “by corruption, fraud or other undue means”
(§ 1286.2, subd. (a)(1)) with respect to Phalen and that the arbitrators failed to hear
evidence (§ 1286.2, subd. (a)(5)) with respect to Schulz. The court then found that the
third “ground is insufficient because: the determination of an expert’s qualifications is
within the powers of the arbitral panel; [Davis] was not precluded from calling another
expert; and the arbitral panel, in any event, found in favor of [respondents] on other
grounds too, including that [Davis’] claims were barred by applicable statute of
limitations.”
With respect to the first ground of section 1286.2, subdivision (a), that the award
was procured by fraud or undue means (§ 1286.2, subd. (a)(1)) based on Phalen’s refusal
13
to testify, the trial court noted that Davis did not claim that the arbitral panel was guilty of
corruption, fraud, or misconduct. The court also found that Phalen “could nonetheless
have testified under an asserted privilege.” The court stated that, in any event, his
testimony “would only be offered to corroborate [Davis’] own testimony of improper
conduct by WFP personnel. The arbitral panel did consider [Davis’] evidence of such
improper conduct and ruled against [her]. The arbitral panel, furthermore, gave two
independent grounds for their decision that were not influenced by the disputed evidence
as to WFP’s alleged improper conduct.” The court concluded that “in applying the code
sections that are applicable to the proceeding to confirm an arbitration award, I do not
find a basis to set aside or modify this particular arbitration award.”
DISCUSSION
As she argued in the trial court, Davis argues on appeal that the arbitration award
must be vacated pursuant to section 1286.2, subdivision (a)(5), because the arbitrators
refused to hear material evidence in the form of testimony by Schultz, and section
1286.2, subdivision (a)(1), because respondents procured the award “by corruption, fraud
or other undue means” by intimidating Phalen and dissuading him from testifying. We
conclude that Davis has not shown that the arbitration award should be vacated on either
ground.
A. Standard of Review
When parties submit to binding arbitration, they intend the arbitrators’ award to be
binding and final. (Haworth v. Superior Court (2010) 50 Cal. 4th 372, 380; Moncharsh v.
Heily & Blase (1992) 3 Cal. 4th 1, 8-11.) As the trial court observed, review of arbitration
awards is extremely narrow. (Ahdout v. Hekmatjah (2013) 213 Cal. App. 4th 21, 33; Gray
v. Chiu (2013) 212 Cal. App. 4th 1355, 1362.) The arbitrators’ decision is not reviewable
for errors of fact or law. (Moncharsch, supra, at p. 11; Hotels Nevada, LLC v. L.A.
Pacific Center, Inc. (2012) 203 Cal. App. 4th 336, 354.) We “may not review the merits
14
of the underlying controversy or the arbitrator’s reasoning, even when an error of law is
apparent on the face of the award and causes substantial injustice. [Citations.]” (Burlage
v. Superior Court (2009) 178 Cal. App. 4th 524, 529; accord, Cable Connection, Inc. v.
DIRECTV, Inc. (2008) 44 Cal. 4th 1334, 1355; Mave Enterprises, Inc. v. Travelers
Indemnity Co. (2013) 219 Cal. App. 4th 1408, 1430.)
We independently review the trial court’s order granting or denying a petition to
vacate an arbitration award. (Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9
Cal. 4th 362, 376, fn. 9; Anaheim Union High School Dist. v. American Federation of
State, etc. (2013) 222 Cal. App. 4th 887, 890, petn. for review pending, petn. filed Feb. 14,
2014.) But we “apply the substantial evidence standard to the extent the trial court’s
ruling rests upon a determination of disputed factual issues. [Citations.]” (Burlage v.
Superior Court, supra, 178 Cal.App.4th at p. 529; SWAB Financial, LLC v. E*Trade
Securities, LLC (2007) 150 Cal. App. 4th 1181, 1196.) We accord every reasonable
intendment to an arbitration award. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p.
9; see Ikerd v. Warren T. Merrill & Sons (1992) 9 Cal. App. 4th 1833, 1841 [“[o]ur review
of an arbitration award requires us to extend to it every intendment of validity and the
party claiming error has the burden of supporting his contention”].) The party seeking to
vacate an arbitration award has the burden of showing that one of the six grounds listed in
section 1286.2, subdivision (a), applies and that the party was prejudiced by the alleged
grounds for vacating the award. (See Comerica Bank v. Howsam (2012) 208 Cal. App. 4th
790, 826; Lopes v. Millsap (1992) 6 Cal. App. 4th 1679, 1685.)
B. The Exclusion of Schulz’s Testimony Does Not Require Vacating the
Arbitration Award Under Section 1286.2, Subdivision (a)(5)
Even though respondents made a motion at the arbitration to exclude Schulz
because he lacked qualification to testify as an expert, and the arbitrators granted that
motion at the hearing, Davis does not argue that the arbitrators excluded Schulz because
he lacked qualifications or that the arbitrators erred in making such a ruling. Indeed,
Davis states that because the arbitrators excluded Schulz’s testimony as a discovery
15
sanction, his “qualifications, and/or the panel’s right to determine them, are not at
issue . . . .”7 Davis contends that “the dispositive questions here are: 1) was Mr. Schulz’s
testimony material; and 2) was the exclusion of Mr. Schulz’s testimony prejudicial?” In
Davis’ view, because Schulz’s testimony would have been material and necessary to
prove her case, its exclusion was necessarily prejudicial and the trial court erred in
refusing to vacate the arbitration award.
The fact that arbitrators erroneously exclude evidence, however, does not
automatically mean that the losing party has a basis for vacating an arbitration award. As
the court explained in Burlage v. Superior Court, supra, 178 Cal.App.4th at page 529,
inherent in the arbitrators’ power to decide all factual and legal questions raised in the
arbitration “‘is the possibility the arbitrator may err in deciding some aspect of the case.
Arbitrators do not ordinarily exceed their contractually created powers simply by
reaching an erroneous conclusion on a contested issue of law or fact . . . ,’ and awards
may not be vacated due to such error because ‘“‘[t]he arbitrator’s resolution of these
issues is what the parties bargained for . . . .’”’ [Citations.] ‘When parties opt for the
forum of arbitration they agree to be bound by the decision of that forum knowing that
arbitrators, like judges, are fallible.’ [Citation.] [¶] But tolerance for fallibility has its
limits. Section 1286.2, subdivision (a)(5) provides that a court ‘shall’ vacate an award
when a party’s rights ‘were substantially prejudiced . . . by the refusal of the arbitrator []
to hear evidence material to the controversy . . . .’ This section has been interpreted as ‘a
safety valve in private arbitration that permits a court to intercede when an arbitrator has
prevented a party from fairly presenting its case.’ [Citation.]”
7 Because Davis states that there is no issue on appeal with respect to Schulz’s
qualifications or the panel’s right to determine them, she has forfeited any claim that the
award should be vacated because the arbitrators erroneously excluded Schulz for lack of
qualifications to testify as an expert. (See Lewis v. Fletcher Jones Motor Cars, Inc.
(2012) 205 Cal. App. 4th 436, 451, fn. 4; Karlsson v. Ford Motor Co. (2006) 140
Cal. App. 4th 1202, 1231.)
16
“Typically, a trial court reviewing a ruling excluding evidence first resolves any
dispute over materiality and then considers whether excluding material evidence caused
substantial prejudice. Under Moncharsh [v. Heily & Blase, supra, 3 Cal.4th at page 11],
‘it is the general rule that, with narrow exceptions, an arbitrator’s decision cannot be
reviewed for errors of fact or law.’ . . . Subdivision [(a)(5)] of section 1286.2, applied in
the usual two-step manner, would often permit a court to second-guess an arbitrator’s
legal theory if materiality hinged on the validity of the arbitrator’s differing view of the
law. If an arbitrator excluded evidence as immaterial, a reviewing superior court could
examine the arbitrator’s theory of the case while analyzing the materiality of evidence the
arbitrator excluded. [¶] . . . In the typical arbitration, an arbitrator must make numerous
decisions about admission of evidence and in doing so may exclude material evidence.
No doubt there will often be aggrieved parties who believe they have been ‘substantially
prejudiced.’ Decisions about materiality cannot be made without familiarity with the
issues and evidence in the arbitration. If the superior court must, with or without a
transcript of the arbitration, routinely review the arbitrator’s decision on materiality
before reaching the question of substantial prejudice, the legislative goal of arbitral
finality will be unattainable. Instead of saving time and money, the arbitration will be
supplemented by lengthy and costly judicial second-guessing of the arbitrator.” (Hall v.
Superior Court (1993) 18 Cal. App. 4th 427, 438.) The court in Hall rejected “the
suggestion . . . that section 1286.2, subdivision [(a)(5)], provides a back door to
Moncharsh through which parties may routinely test the legal theories of arbitrators.”
(Hall, supra, at pp. 438-439; see Schlessinger v. Rosenfeld, Meyer & Sussman (1995) 40
Cal. App. 4th 1096, 1110 [the “contention . . . that the arbitrator did not permit [a party] to
offer material evidence . . . could be made in virtually every case where the arbitrator has
excluded some evidence or placed limitations on discovery,” and “this type of attack on
the arbitrator’s decision, if not properly limited, could swallow the rule that arbitration
awards are generally not reviewable on the merits”].) Rather, the subdivision only
“permits a court to intercede when an arbitrator has prevented a party from fairly
17
presenting its case.” (Hall, supra, at p. 439; accord, SWAB Financial, LLC v. E*Trade
Securities, LLC, supra, 150 Cal.App.4th at p. 1196.)
We agree with Davis that expert testimony is generally required to prove a claim
of professional negligence. (See Unigard Ins. Group v. O’Flaherty & Belgum (1995) 38
Cal. App. 4th 1229, 1239 [“as a general rule the standard of care against which the
professional’s acts are measured remains a matter peculiarly within the knowledge of
experts,” and “[o]nly their testimony can prove it”]; accord, Flowers v. Torrance
Memorial Hospital Medical Center (1994) 8 Cal. 4th 992, 1001; Garibay v. Hemmat
(2008) 161 Cal. App. 4th 735, 741). We also agree that erroneous exclusion of “all
evidence relating to a claim, or essential expert testimony without which a claim cannot
be proven” is generally prejudicial. (Gordon v. Nissan Motor Co., Ltd. (2009) 170
Cal. App. 4th 1103, 1115, italics added; see People ex rel. Dept. of Transportation v.
Clauser/Wells Partnership (2002) 95 Cal. App. 4th 1066, 1086 [“‘[i]t is prejudicial error to
exclude relevant and material expert evidence where a proper foundation for it has been
laid, and the proffered testimony is within the proper scope of expert opinion’”]).
Nevertheless, arbitrators have the authority to exclude evidence, including
testimony by expert witnesses, for discovery violations, under the Code of Civil
Procedure and the FINRA Code of Arbitration Procedure for Customer Disputes.
Section 1283.05, subdivision (b), provides that arbitrators “have power, in addition to the
power of determining the merits of the arbitration, to enforce the rights, remedies,
procedures, duties, liabilities, and obligations of discovery by the imposition of the same
terms, conditions, consequences, liabilities, sanctions, and penalties as can be or may be
imposed in like circumstances in a civil action by a superior court of this state under the
provisions of this code, except the power to order the arrest or imprisonment of a
person.” (See Berglund v. Arthroscopic & Laser Surgery Center of San Diego, L.P.
(2008) 44 Cal. 4th 528, 535 [“[s]ection 1283.05’s subdivision (b) grants arbitrators the
power to enforce discovery through sanctions,” and “[t]hus, in an arbitration proceeding
the arbitrator’s power to enforce discovery resembles that of a judge in a civil action in
superior court”]; Alexander v. Blue Cross of California (2001) 88 Cal. App. 4th 1082,
18
1091 [section 1283.05 grants power to an arbitrator to impose discovery sanctions];
accord, Miranda v. 21st Century Ins. Co. (2004) 117 Cal. App. 4th 913, 923.) Superior
court judges have the authority in appropriate circumstances to exclude expert testimony
as a discovery sanction. (See Boston v. Penny Lane Centers, Inc. (2009) 170 Cal. App. 4th
936, 952 [court may exclude expert opinion for unreasonable failure to produce expert
reports and writings]; Waicis v. Superior Court (1990) 226 Cal. App. 3d 283, 287 [trial
court had discretion to preclude testimony of expert who “was not cooperating with
discovery”].) Similarly, the FINRA arbitration rules, to which the parties agreed to be
bound, permit the arbitrators to “[p]reclud[e] a party from presenting evidence” for
failure to comply with “any order of the panel . . . .” (FINRA rule 12212(a).) The
FINRA rules also specifically authorize discovery sanctions for “[f]ailure to cooperate in
the exchange of documents and information . . .” and “[f]ailing to comply with the
discovery provisions of the Code [of Arbitration Procedure for Customer Disputes] . . . .”
(FINRA rule 12511(a).)8
Here, the arbitrators stated in the arbitration award that they excluded Schulz’s
testimony as a discovery sanction. The arbitrators found that Davis and Schulz
deliberately failed to comply with the panel’s orders and that their “non-compliance
prejudiced” respondents. Davis does not argue that the arbitrators’ discovery sanction
was incorrect or inappropriate, nor does Davis include in the record the discovery orders
and violations that were the basis of the discovery sanction. Davis’ mere disagreement
with the arbitrators’ discovery ruling is an insufficient basis for vacating the arbitration
award. (Hall v. Superior Court, supra, 18 Cal.App.4th at pp. 438-439; see Evans v.
Centerstone Development Co. (2005) 134 Cal. App. 4th 151, 164 [under section 1283.05,
8 We grant Davis’ request for judicial notice of FINRA rule 12212 and take judicial
notice under Evidence Code sections 452, subdivision (h), and 459 of FINRA rule 12511.
FINRA rule 12409, of which we have taken judicial notice at respondents’ request,
provides that “[t]he panel has the authority to interpret and determine the applicability of
all provisions under the Code. Such interpretations are final and binding upon the
parties.”
19
“arbitrators have great latitude and discretion when ruling on discovery matters”].)9 The
propriety of the arbitrators’ decision to impose a discovery sanction is not subject to
judicial review. (See Bak v. MCL Financial Group, Inc. (2009) 170 Cal. App. 4th 1118,
1124 [FINRA rules permit arbitrators to make decisions and take action regarding
discovery, and their decisions and actions are final and binding on the parties]; Alexander
v. Blue Cross of California, supra, 88 Cal.App.4th at p. 1089 [erroneous discovery order
does not exceed arbitrators’ powers under section 1286.2, subdivision (a)(4)].)10
Davis asserts that the arbitrators’ exclusion of Schulz’s testimony for discovery
violations, without notice and an opportunity to cure, was improper. She focuses on the
arbitrators’ failure to state at the hearing why they were excluding Schulz’s testimony
after Watkins had made statements the previous day that he did not think the conduct of
counsel for Davis in producing documents over the weekend was intentional and that the
parties could proceed with the arbitration. Davis argues that Watkins’ statements misled
her into believing there was no discovery issue. She does not point to anything in the
9 None of the cases Davis cites with respect to the exclusion of Schulz’s testimony
involved a discovery sanction imposed in an arbitration proceeding. (See Sole Energy
Co. v. Hodges (2005) 128 Cal. App. 4th 199, 207; Newland v. Superior Court (1995) 40
Cal. App. 4th 608, 610; Thomas v. Luong (1986) 187 Cal. App. 3d 76, 80-81; Alliance Bank
v. Murray (1984) 161 Cal. App. 3d 1, 5; Morgan v. Ransom (1979) 95 Cal. App. 3d 664,
670; Caryl Richards, Inc. v. Superior Court (1961) 188 Cal. App. 2d 300, 305.)
10 Thus, this is not a case, like the cases from other jurisdictions cited by Davis,
where the arbitrators simply refused to hear evidence material to the controversy. (See,
e.g., Bordonaro v. Merrill Lynch, Pierce, Fenner & Smith (2004) 156 Ohio App. 3d 358,
367 [805 N.E.2d 1138, 1144] [arbitrators excluded expert testimony regarding the
standard of care for a securities broker and the suitability of investments, apparently not
believing such testimony was admissible or necessary]; cf. Unigard Ins. Group v.
O’Flaherty & Belgum, supra, 38 Cal.App.4th at p. 1239 [erroneous determination that as
a matter of law the defendant met the standard of care prevented the plaintiff from
introducing expert testimony regarding the defendant’s professional negligence];
Vucinich v. Paine, Webber, Jackson & Curtis, Inc. (9th Cir. 1986) 803 F.2d 454, 461
[trial court erroneously excluded testimony by the plaintiff’s expert on the rules of the
New York Stock Exchange and National Association of Securities Dealers due to
confusion about whether they were a proper subject for expert testimony].)
20
FINRA rules or the arbitration agreement, however, that required the arbitrators to
explain their evidentiary rulings at the time they make them. (See Armendariz v.
Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 4th 83, 107 [under section
1283.4, and in cases not involving FEHA or other unwaivable statutory rights, arbitrators
need not make express findings on each issue]; Sapp v. Barenfeld (1949) 34 Cal. 2d 515,
522 [“‘[t]here is no general rule that arbitrators must find facts and give reasons for their
awards,’” and “‘[i]n fact, the rule and general practice is to the contrary’”].) FINRA rule
12604(a), of which we take judicial notice pursuant to Evidence Code sections 452,
subdivision (h), and 459 states only that “[t]he panel will decide what evidence to admit,”
and that “[t]he panel is not required to follow state or federal rules of evidence.”
Finally, as the trial court recognized, the arbitrators had independent grounds for
ruling in respondents’ favor: the running of the statute of limitations and the filing of
other actions by Davis in violation of FINRA rule 12209.11 Because respondents were
entitled to an award in their favor on these other grounds, the arbitrators’ exclusion of
Davis’ expert witness did not prejudice her. (See Hall v. Superior Court, supra, 18
Cal.App.4th at p. 439; Employers Ins. Of Wausau v. National Union Fire Ins. Co. (9th
Cir. 1991) 933 F.2d 1481, 1490 [court will not vacate arbitration award based on
erroneous exclusion of evidence where arbitrator would not have made a different award
had the evidence not been excluded].)12
11 FINRA rule 12209 provides: “During an arbitration, no party may bring any suit,
legal action, or proceeding against any other party that concerns or that would resolve
any of the matters raised in the arbitration.” The arbitrators found that Davis filed, in
addition to the FINRA arbitration, claims with the American Arbitration Association and
JAMS Arbitration, Mediation and ADR Services, as well as “a court case against
sponsors of several of her investments,” including in Sacramento and Texas. The
arbitrators “found it highly likely that [Davis] sought double recovery from the claims
[she] filed in this arbitration in other forums.”
12 Davis asserts that Schulz’s testimony was necessary to refute respondents’ statute
of limitations defense. There is no evidence in the record, however, that Davis made
such an offer of proof at the arbitration. Davis submitted a “rough outline” of what
Schulz’s testimony at the arbitration hearing would have been, but she did so only after
21
C. The Failure of Phalen To Testify Does Not Require Vacating the
Arbitration Award Under Section 1286.2, Subdivision (a)(1)
Davis contends that the arbitration award must be vacated because respondents
procured it by “corruption, fraud or other undue means” under subdivision (a)(1) of
section 1286.2 in the form of witness intimidation. Subdivision (a)(1) applies whether
the corruption, fraud, or undue means are perpetrated by the arbitrators or a party.
(Comerica Bank v. Howsam, supra, 208 Cal.App.4th at p. 825; Pacific Crown
Distributors v. Brotherhood of Teamsters (1986) 183 Cal. App. 3d 1138, 1146-1147.)
Davis argues that “it is illegal to impose a prohibition upon testifying in other
proceedings in a settlement agreement.”13 Although the settlement agreement between
Phalen and WFP is not in the record, Reif referred to it in his declaration filed in
opposition to Davis’ motion to vacate the arbitration award as a “confidential settlement
agreement,” and he stated that it “contained ‘Confidentiality and Non-Disparagement’
provisions.” There is case law suggesting that confidentiality provisions, perhaps like the
ones in the Phalen-WFP settlement agreement (depending what they say), might be
unenforceable, at least to the extent the confidentiality provisions prohibit
communication with government security regulators.
For example, in Cariveau v. Halferty (2000) 83 Cal. App. 4th 126 the court
addressed “the validity of a confidentiality clause in a settlement agreement that
prohibited the customer in a securities transaction from discussing the selling agent’s
misconduct with regulatory authorities.” (Id. at p. 128.) The confidentiality provision
the arbitration in connection with her motion to vacate the award, and respondents
properly objected to this document. Moreover, even if Davis had told the arbitrators how
the exclusion of Schulz’s testimony affected her ability to respond to respondents’ statute
of limitations defense, Davis has not challenged the arbitrators’ additional basis for the
award, violation of FINRA rule 12209.
13 Although Davis cites Penal Code sections 136.1 and 138 regarding witness
intimidation and bribing a witness in her briefs, she does not claim to have pressed
charges against WFP under either of those statutes.
22
stated: “‘The terms and conditions of this Forbearance Agreement and Mutual Release
and each and all of the underlying events resulting in the negotiation of this Agreement
shall remain private and confidential in all respects and shall not be disclosed by any
party hereto, . . . for any reason whatsoever, to any public or private person or entity, or
to any administrative, law enforcement or regulatory agency.’” (Id. at p. 129, fn.
omitted.) The court held that the confidentiality clause violated public policy as
expressed in the Securities Exchange Act of 1934 (15 U.S.C. § 78cc(b)) and NASD rules.
(Cariveau, supra, at pp. 131, 133.) “The confidentiality agreement sought to be enforced
in this case expressly prohibited disclosure of the facts underlying the agreement to ‘any
public or private person or entity, or to any administrative, law enforcement or regulatory
agency.’ The only exception to the prohibition was in the case of a party under a court
order to disclose, if the party was not responsible for initiation of the inquiry resulting in
the order.” (Id. at p. 134.) The selling agent “admitted that the purpose of the
confidentiality clause . . . was to prevent the customer from disclosing [her improper
actions] to the NASD and the employer.” (Id. at pp. 134-135.) The court concluded that
“[t]he public policy express and implied from the securities laws and regulations
outweighs the general interest in settling disputes without litigation. To permit [the
agent’s] violations of rules and shield them from administrative review in an agreement
to silence wrongdoing would undermine the public’s confidence in the integrity of
securities oversight. This type of secret settlement should not be left in some dark
oubliette,[14] leaving investors unprotected. To countenance this agreement would
encourage future NASD violators to hide their misdeeds in a secret agreement free from
the light of regulatory scrutiny.” (Id. at p. 137; see Williamson v. Superior Court (1978)
21 Cal. 3d 829, 836 [“[a]greements to suppress evidence have long been held void as
against public policy”]; Smith v. Superior Court (1996) 41 Cal. App. 4th 1014, 1026
[stipulated injunction prohibiting employee from testifying or consulting in connection
14 An oubliette is a dungeon with a door or other opening only at the top.
23
with any future litigation against employer violated “our fundamental public policy
against suppression of evidence”].)
Davis, however, never asked the arbitrators to compel Phalen to attend the
arbitration in order to determine whether respondents had acted improperly and
intimidated him into refusing to testify, and to allow Brown to question Phalen and the
panel to rule on any confidentiality objections respondents might make to specific
questions. The arbitrators never held a hearing on the nature and validity of the
confidentiality provisions or on the issue of possible witness intimidation and whether
WFP used undue means to prevent Phalen from testifying. The after-the-fact declarations
submitted in support of and opposition to Davis’ petition to vacate the arbitration award
are not a substitute for an evidentiary hearing at the arbitration on these issues. (Cf.
Glaser, Weil, Fink, Jacobs & Shapiro, LLP v. Goff (2011) 194 Cal. App. 4th 423, 436, fn.
4 [“independent judicial review of whether an arbitration award was binding” does not
“require the trial court to take live testimony rather than relying on written submissions
such as declarations or the arbitration record].)
In the trial court, Reif generally denied engaging in any intimidation or other
wrongful conduct and specifically denied the charges made by Brown and Phalen. Reif
stated in his declaration that he sent Uhl, Phalen’s attorney, a letter “reiterating the terms
of Phalen’s settlement agreement with WFP” and “emphasiz[ing] . . . the ‘Confidentiality
and Non-Disparagement’ provisions.” Reif denied Phalen’s statement that Reif had
orally threatened him and agreed with Phalen that the two of them “never spoke or
communicated in writing or verbal[ly], ever.” Reif denied Brown’s statement that Reif
had spoken directly with Phalen and denied Brown’s accusation that he had “threatened
to sue Mr. Phalen if he appeared as a witness on [Davis’] behalf” at the arbitration. Reif
stated that he informed Brown there was a settlement agreement between Phalen and
Brown containing confidentiality provisions and that he “intended to recommend that the
non-breaching parties to the confidential settlement agreement would seek to enforce its
provisions.”
24
Absent a sufficient record of the terms of the confidentiality provisions in the
settlement agreement between Phalen and WFP, we cannot find that they are void as
against public policy and unenforceable. Nor can we conclude that respondents and their
attorneys used the settlement agreement to intimidate Phalen, who was represented by
counsel, from testifying at the arbitration, and thereby procured the award by corruption,
fraud, or undue means. There is substantial evidence to support the trial court’s
resolution of this conflict in the evidence and the court’s implied finding that Reif’s
statements did not amount to threats to sue Phalen for merely appearing at the arbitration.
DISPOSITION
The order is affirmed. Respondents are to recover their costs on appeal.
SEGAL, J.*
We concur:
PERLUSS, P. J.
WOODS, J.
* Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to
article VI, section 6 of the California Constitution.
25