Judge: Michael Shultz, Case: 21STCV22811, Date: 2024-12-12 Tentative Ruling

DEPARTMENT 40 - JUDGE ANNE RICHARDSON - LAW AND MOTION RULINGS
The Court issues tentative rulings on certain motions.The tentative ruling will not become the final ruling until the hearing [see CRC 3.1308(a)(2)]. If the parties wish to submit on the tentative ruling and avoid a court appearance, all counsel must agree and choose which counsel will give notice. That counsel must 1) email Dept 40 by 8:30 a.m. on the day of the hearing (smcdept40@lacourt.org) with a copy to the other party(ies) and state that all parties will submit on the tentative ruling, and 2) serve notice of the ruling on all parties. If any party declines to submit on the tentative ruling, then no email is necessary and all parties should appear at the hearing in person or by Court Call. 

Case Number: 21STCV22811    Hearing Date: December 12, 2024    Dept: 40

21STCV22811 Xtractor Depot, LLC v. Usama Tohid

Thursday, December 12, 2024

[TENTATIVE] ORDER DENYING DEFENDANT’S PETITION TO VACATE ARBITRATION AWARD

[TENTATIVE] ORDER GRANTING PLAINTIFF’S MOTION TO CONFIRM ARBITRATION AWARD AND ENTER JUDGMENT

                                                  I.          BACKGROUND

The complaint alleges Plaintiff (“Employer” or “Plaintiff”) hired Defendant (“Employee” or “Defendant”) as an engineer to perform peer reviews and field verifications. Plaintiff discovered that Defendant performed services for Plaintiff’s clients but diverted the payments for those services to Defendant’s own competing business. Plaintiff alleges claims for conversion, fraud and concealment, violation of Penal Code § 503, and for a constructive trust.

On November 5, 2021, the court granted Defendant Employee’s motion to compel arbitration of Employer’s claims alleged here to be consolidated with Employee’s FEHA and tort claims that were already being arbitrated.

                                                   II.         ARGUMENTS

Defendant moves to vacate the arbitration award on grounds the Arbitrator exceeded his powers when the Arbitrator issued his final award on August 8, 2024 awarding fees to Plaintiff Employer based on a nondisclosure agreement (“NDA”) that the Arbitrator found to be unenforceable. Vacating the award is warranted as the award cannot be corrected without affecting the merits of the decision. Defendant urges the court to vacate the attorney’s fees and costs awarded to Plaintiff as that award also contravened fee statute under the Fair Employment and Housing Act (“FEHA”). Even though Defendant Employee did not prevail on his FEHA claims, the Act’s provisions permitting an award of fees to the employer as a prevailing party must be based on a finding that the Employee’s FEHA claims were frivolous.

In opposition, Plaintiff argues that the court’s power to review an arbitration award is extremely narrow. The court may not review the award for errors of fact or law. Defendant’s contentions are frivolous. The Arbitrator found some portions of the NDA unenforceable which does not mean that fees could not be awarded pursuant to the portions of the NDA that were lawful.

In reply, Defendant Employee argues that the court does have authority to review and vacate arbitration awards that are inconsistent with statutory rights or policies. The FEHA fee-shifting provisions permit an award of fees only if the petitioner’s claims were frivolous. Awarding fees to the Employer under the NDA is against public policy since the Arbitrator declared it unenforceable.

                                                   III.        DISCUSSION

A.      The matters submitted to binding arbitration.

DEFENDANT EMPLOYEE’S CLAIMS (Kyle Kubisch Decl , Ex. 3 , p.14.)

1)      Wrongful termination in violation of public policy for allegedly terminating Defendant for reporting Defendants’ federal and state violations

2)      Whistleblower retaliation

3)      Retaliation in violation of FEHA

4)      Breach of oral and implied-in-fact contract

5)      Fraud

6)      Common counts

7)      Money had and received

8)      Violation of Bus & Prof Code § 17200

9)      Accounting and

10)   declaratory relief

PLAINTIFF EMPLOYER’S COUNTER CLAIMS (Kubisch decl., Ex. 4, p. 14)

1)      Conversion for interfering with Plaintiff’s revenue

2)      Fraud/Concealment for representing to Plaintiff’s clients to issue payment to him

3)      Violation of Penal Code § 503 (embezzlement)

4)      Imposition of a constructive trust for funds wrongfully obtained by Defendant

5)      Misappropriation of trade secrets

THE ARBITRATOR’S FINDINGS (IN RELEVANT PART) (Kubisch decl., Ex. 5.)

Defendant Employee prevailed on the 10^th cause of action for declaratory relief. The Arbitrator found that portions of the NDA were fatally overbroad, unlawful restraints of trade or profession, contrary to California law and therefore, unenforceable. (Id., Ex. 5, p. 4 ¶ 21-22, 26.) Defendant’s remaining claims were rejected. (Kubisch decl., Ex. 6, Partial Final Order p. 28, ¶¶ 126 and 129;  p. 29, ¶125; p. 29 ¶ 129; p.29 ¶ 131.)

The Employer prevailed on its counterclaims for conversion, fraud, and concealment, and was awarded compensatory damages,  (Id. p.33, ¶ 149; p. 35 ¶ 159.)

The award of fees and costs were covered in a Final Award, discussed below.

B.      ANALYSIS

The court shall confirm an award as made unless it corrects the award as permitted by statute and confirms it as corrected, or vacates the award, or dismisses the proceeding. (Code Civ. Proc., § 1286.) The court may vacate the award for grounds articulated by statute which includes a determination that the arbitrators “exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted." (Code Civ. Proc., § 1286.2 subd. (a)(4).)

A court’s review of an arbitration award is extremely limited. While an arbitrator’s award "is not generally reviewable for errors of fact or law, whether or not such error appears on the face of the award and causes substantial injustice to the parties," there are narrow exceptions. (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 11.) Judicial review is permitted where illegality of contract exists. If the illegality, however, goes only to a portion of the contract, "the entire controversy, including the issue of illegality, remains arbitrable.” (Moncharsh at 30.) Judicial review is permitted if the arbitrator’s decision is incompatible with the protection of a statutory right or public policy. (Moncharsh at 33.)

As previously stated, Employee prevailed only on his declaratory relief claim based on a finding that portions of the NDA were overbroad, unlawful restraints of trade or profession, contrary to California law and therefore unenforceable. (Id., Ex. 5, p. 4 ¶ 21-22, 26.) Defendant’s contention that fees could not be awarded pursuant to the NDA because the Arbitrator found that the “primary provisions” were unenforceable, is without merit. (Pet. 9:12-13.).

The Arbitrator determined that Plaintiff Employer received the greater relief on the contract claims alleged by the parties (Kubich decl., Ex. 18, ¶ 32-33.) The Final Award concluded that the dominant component of the case was “Claimant’s own oral/implied-in-fact contract claim – and his diversion and retention of client payments pursuant to that alleged contract.” (Ex. 18, ¶ 32). Plaintiff employer prevailed on that claim, and was therefore, the prevailing party. (Id.) ¶ 33.)

The Arbitrator noted that Defendant challenged some portions of the NDA but did not challenge the portion that stated: “’The arbitrator shall, in the Award, allocate … the actual expert and attorneys’ fees incurred by the prevailing party, to the losing party.’ That language is unambiguous.” (Ex. 18, p. 14 ¶ 43.) The entire NDA was not invalidated. The fee provision was not “void ab initio” as Plaintiff contends. (Pet. 18:15-16.) Accordingly, Defendant has not established that awarding fees under a provision of the NDA that Defendant did not seek to invalidate does not demonstrate that the Arbitrator exceeded his powers.

Under FEHA, the court may award fees and costs to the prevailing party, however, "a prevailing defendant shall not be awarded fees and costs unless the court finds the action was frivolous, unreasonable, or groundless when brought, or the plaintiff continued to litigate after it clearly became so.” (Gov. Code, § 12965 subd. (c)(6).)  Employee acknowledges that his employment-related claims were rejected. (Pet., 1:15-17.)

The Arbitrator determined that the “record herein contains no credible evidence whatsoever to support Claimant’s [Defendant Employee] wrongful termination, whistleblower, and/or unlawful retaliation claims … . Therefore, for purposes of determining an award of attorneys’ fees and legal expenses in this case, the Arbitrator finds those claims to have been groundless, unreasonable, and/or totally and completely without merit, i.e., frivolous.” (Kubisch decl., Ex. 18, ¶ 50.)

While Defendant contends the Partial Final Award (“PFA”) did not find that Defendant’s claims were frivolous, the PFA makes clear that fees and expenses and allocation thereof would be reserved for the Final Award; the PFA resolved the compensatory damage claims.[1] As noted above the Final Award made the findings that triggered the fee shifting provisions of section 12965, allowing for an award of fees to the employer. The award of fees were made on express findings by the arbitrator grounded in the evidence and permitted by statute and cannot be “against public policy” to constitute grounds for vacating the award as being in excess of the Arbitrator’s power.

To the extent Defendant disagrees with the Arbitrator’s finding or argues it is erroneous or contrary to law, that issue is not subject to review by the trial court under Moncharsh.

Defendant argues here as he did at the time of arbitration that the fee award to Plaintiff Employer violated the principles articulated in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 110–111 [“The arbitration agreement or arbitration process cannot generally require the employee to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court. This rule will ensure that employees bringing FEHA claims will not be deterred by costs greater than the usual costs incurred during litigation, costs that are essentially imposed on an employee by the employer."].)

The Arbitrator rejected Defendant’s argument, concluding that Armendariz was not focused on attorney’s fees “but on arbitral ‘forum costs,’ i.e., ‘the often substantial costs of arbitrators and arbitration’ which could effectively prevent employees ‘from vindicating their FEHA right’ if employees were required to share or bear such ‘arbitration-specific costs.’” (Kubisch Decl., Ex. 18, ¶ 46. The Arbitrator concluded that Armendariz and its progeny did not address the issues here: “whether an employee who affirmatively chooses to initiate – and indeed to compel – arbitration [citation omitted] against an employer pursuant to an arbitration clause in an employment-related agreement can thereby fully insulate himself from an award of attorneys’ fees even if his FEHA-related claim (a) is only one of numerous claims and counterclaims asserted [citation omitted] and (b) wholly lacks merit to the point of appearing pretextual or frivolously asserted [citation omitted]. Herein, the Arbitrator specifically held that Claimant’s various wrongful termination claims were ‘unsubstantiated and lacking in credibility.’” (Kubich Decl., Ex. 18, ¶ 47.

The Arbitrator observed that all of the Employer’s claims arose out of or in connection with the NDA, and “are all explicitly dependent on and/or inextricably intertwined with the obligations created under the NDA and those which are already the subject of the pending JAMS arbitration.” (Kubisch Decl., Ex. 18, ¶ 49.)

This court cannot review an Arbitrator’s conclusion for legal error. Given Defendant’s insistence throughout the litigation that the Employer’s claims were grounded in the NDA, Defendant has not persuasively established that awarding fees pursuant to the NDA, based on a provision that Defendant did not challenge would be against public policy, illegal, or unenforceable. 

                                                 IV.        CONCLUSION

[TENTATIVE] ORDER GRANTING PLAINTIFF’S MOTION TO CONFIRM ARBITRATION AWARD AND ENTER JUDGMENT

I.        ARGUMENTS

Plaintiff moves for an order to confirm the arbitration award which is required unless the court corrects the award, confirms it as corrected, vacates the award or dismisses the proceeding. (Code Civ. Proc., § 1286.). Plaintiff argues that there are no grounds to vacate the award and must render a judgment confirming it.

In opposition, Defendant incorporates his arguments in his Petition to Vacate the Arbitration Award and notes that he has paid damages awarded to Plaintiff in the Partial Final Award.

In reply, Plaintiff informs that Defendant paid $365,587.62 to satisfy the order for restitution in the criminal proceeding, which does not resolve civil liability.

II.      DISCUSSION AND CONCLUSION

In a separate ruling, the court found that Defendant did not provide a basis for vacating the award. Without any basis for vacating the award, the court “shall” confirm the award as made. (Code Civ. Proc., § 1286.) Accordingly, the court GRANTS Plaintiff’s Motion to Confirm the Arbitration Award. Plaintiff is ordered to submit a proposed judgment.