Judge Teresa A. Beaudet, Case 22STCV29861 2023-03-28 Tentative Ruling

Plaintiffs Salt + Vinegar LLC (“S + V”), Amir Kashani (“Kashani”), and Daniel Feldstein (“Feldstein”) (collectively, “Plaintiffs”) filed this action on September 13, 2022 against Defendants Kaplan, Kenegos & Kadin (“the Kaplan Firm”) and Jerry Kaplan (jointly, “Defendants”). The Complaint asserts causes of action for (1) negligence (legal malpractice), (2) beach of fiduciary duty, (3) breach of contract.

Defendants now move to compel arbitration of the claims against them. Plaintiffs oppose.

In a motion to compel arbitration, the moving party must prove by a preponderance of evidence the existence of the arbitration agreement and that the dispute is covered by the agreement. The burden then shifts to the resisting party to prove by a preponderance of evidence a ground for denial (e.g., fraud, unconscionability, etc.). (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413-414.)

Generally, on a petition to compel arbitration, the court must grant the petition unless it finds either (1) no written agreement to arbitrate exists; (2) the right to compel arbitration has been waived; (3) grounds exist for revocation of the agreement; or (4) litigation is pending that may render the arbitration unnecessary or create conflicting rulings on common issues. (Code Civ. Proc., § 1281.2; see Condee v. Longwood Management Corp. (2001) 88 Cal.App.4th 215, 218-219.)

“California has a strong public policy in favor of arbitration and any doubts regarding the arbitrability of a dispute are resolved in favor of arbitration.” (Coast Plaza Doctors Hospital v. Blue Cross of California (2000) 83 Cal.App.4th 677, 686.) “This strong policy has resulted in the general rule that arbitration should be upheld unless it can be said with assurance that an arbitration clause is not susceptible to an interpretation covering the asserted dispute.” (Ibid. [internal quotations omitted].) This is in accord with the liberal federal policy favoring arbitration agreements under the Federal Arbitration Act (“FAA”), which governs all agreements to arbitrate in contracts “involving interstate commerce.” (9 U.S.C. § 2, et seq.; Higgins v. Superior Court (2006) 140 Cal.App.4th 1238, 1247.)

Defendants indicate that S + V entered into a Retainer Agreement with the Kaplan Firm on March 20, 2019 (the “Retainer Agreement”). (Kenegos Decl., ¶ 3, Ex. 1.) Defendants indicate that Kashani signed the Retainer Agreement. (Ibid.) The Retainer Agreement provides, inter alia, as follows:

“If a dispute arises between Attorney and Client regarding any claim against attorney for

malpractice or other wrongdoing under this agreement, that is, regarding whether any legal services rendered under this agreement were improperly or negligently rendered, the dispute will be submitted to arbitration by, and in accordance with the rules of, Judicial Arbitration Mediation Services, and Attorney and Client will be bound by the result. Client understands and acknowledges that, by agreeing to binding arbitration, he/she waives the right to submit the dispute for determination by a court and thereby also waives the right to a jury or court trial.” (Kenegos Decl., ¶ 3, Ex. 1.)

The Retainer Agreement provides that S + V is referred to as “Client” and “Kaplan, Kenegos & Kadin” is referred to as “Attorneys.” (Kenegos Decl., ¶ 3, Ex. 1.)

Defendants assert that in addition to S + V, both Kashani and Feldstein are bound by the Retainer Agreement. Defendants cite to Pillar Project AG v. Payward Ventures, Inc. (2021) 64 Cal.App.5th 671, 677-678, where the Court of Appeal noted that “[t]he application of equitable estoppel principles to arbitrability questions arises in a variety of circumstances. One such circumstance is that [a] nonsignatory plaintiff may be estopped from refusing to arbitrate when he or she asserts claims that are dependent upon, or inextricably intertwined with, the underlying contractual obligations of the agreement containing the arbitration clause. Another is that [a] nonsignatory is estopped from refusing to comply with an arbitration clause when it receives a direct benefit from a contract containing an arbitration clause.” (Internal quotations and citations omitted.) Defendants assert that Kashani and Feldstein “were named parties in the Atlanta Action and Defendants represented them as individuals in addition to the LLC. Thus, not only are their claims ‘inextricably intertwined’ with the contractual obligations in the Retainer Agreement but, as individuals, they received a ‘direct benefit’ from the services Defendants performed thereunder.” (Mot. at p. 6:7-11.)

In the Complaint, Plaintiffs allege that Kashani and Feldstein are each 50% members of

S + V. (Compl., ¶ 9.) Plaintiffs further allege that on February 7, 2019, LVRN Publishing, LLC, LVRN Management, LLC, and LVRN Records, LLC (collectively, “LVRN”) filed a lawsuit against Plaintiffs in Fulton County Georgia, entitled LVRN Publishing, et al. v. Kashani, et al., Fulton County Super. Ct. No. 2019CV316416 (the “Atlanta Action”). (Compl., ¶¶ 10, 17.)

Plaintiffs further allege that in or about March 2019, Plaintiffs retained Defendants to represent them in connection with the dispute with LVRN, and on May 13, 2019, Defendants filed a lawsuit on behalf of Plaintiffs against LVRN, entitled Salt + Vinegar, et al. v. LVRN Records, et al., Los Angeles County Super. Ct. No. 19STCV16502 (the “Los Angeles Action”). (Compl., ¶¶ 5, 18-19.) Plaintiffs allege that “Defendants breached the standard of care owed to Plaintiffs, and did not provide the degree of legal competence and expertise in connection with the Atlanta Action and Los Angeles Action…” (Compl., ¶ 34.)

Plaintiffs do not dispute that S + V entered into the Retainer Agreement, or that the Retainer Agreement covers the claims alleged against S+V in the instant action. However, Plaintiffs assert that neither Kashani nor Feldstein agreed to the arbitration provision in the Retainer Agreement. Plaintiffs argue that “[s]ince Plaintiffs’ cause of action for legal malpractice do [sic] not rely or depend on the written retainer agreement containing the arbitration provision, but instead are based on their implied attorney-client relationship with Kaplan, it is not ‘inextricably intertwined’ with that agreement.” (Opp’n at p. 3:3-6.)

However, the Court finds that Defendants have the better argument that Kashani and Feldstein’s claims against Defendants are “inextricably intertwined” with the contractual obligations of the Retainer Agreement. The equitable estoppel doctrine “applies where the claims are based on the same facts and are inherently inseparable from the arbitrable claims against signatory defendants.” (Garcia v. Pexco, LLC (2017) 11 Cal.App.5th 782, 786 [internal quotations omitted].) “Claims that rely upon, make reference to, or are intertwined with claims under the subject contract are arbitrable. By relying on contract terms …, even if not exclusively, a plaintiff may be equitably estopped from repudiating the arbitration clause contained in that agreement. The focus is on the nature of the claims asserted by the plaintiff…That the claims are cast in tort rather than contract does not avoid the arbitration clause.” (Pillar Project AG v. Payward Ventures, Inc., supra, 64 Cal.App.5th at p. 678 [internal quotations and citations omitted].)

Here, Kashani and Feldstein’s claims against Defendants are based on the same facts as S+V’s claims. Kashani and Feldstein allege that they are 50% members of S+V, and that in “March 2019, Plaintiffs retained Kaplan to represent them in a connection with the dispute with LVRN.” (Compl., ¶¶ 9, 18.) Plaintiffs also allege that on May 13, 2019, Defendants filed the Los Angeles Action on behalf of Plaintiffs against LVRN. (Compl., ¶ 19.) Plaintiffs allege that “Defendants breached the standard of care owed to Plaintiffs, and did not provide the degree of legal competence and expertise in connection with the Atlanta Action and Los Angeles Action” in a number of ways. (Compl., ¶ 34.) Plaintiffs also allege that “Defendants breached their fiduciary duties to Plaintiffs, in that, among other things, Defendants: (1) failed to competently, properly, or diligently handle the Atlanta Action and Los Angeles Action within the applicable standard of care…” (Compl., ¶ 39(1).)

Thus, the Court finds that Kashani and Feldstein are equitably estopped from repudiating the arbitration clause contained in the Retainer Agreement.

Based on the foregoing, the Court finds that Defendants have demonstrated the existence of an arbitration agreement and that it covers the claims asserted against Defendants in this action. Thus, the burden now shifts to Plaintiffs to prove a ground for denial.

Plaintiffs assert that the entire Retainer Agreement is unenforceable because it violates California Rules of Professional Conduct, Rules 1.7, 1.8.1, and 1.8.8.

California Rules of Professional Conduct, Rule 1.7, subdivision (b) provides that “[a] lawyer shall not, without informed written consent from each affected client and compliance with paragraph (d), represent a client if there is a significant risk the lawyer’s representation of the client will be materially limited by the lawyer’s responsibilities to or relationships with another client, a former client or a third person, or by the lawyer’s own interests.”

Plaintiffs cite to Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (2018) 6 Cal.5th 59, 67-68, where “[a] large law firm agreed to represent a manufacturing company in a federal qui tam action brought on behalf of a number of public entities. During the same time period, the law firm represented one of these public entities in matters unrelated to the qui tam suit. Both clients had executed engagement agreements that purported to waive all such conflicts of interest, current or future, but the agreements did not specifically refer to any conflict and the law firm did not tell either client about its representation of the other. This arrangement fell apart when the public entity discovered the conflict and successfully moved to have the firm disqualified in the qui tam action. A fight over the manufacturer’s outstanding law firm bills followed, and the dispute was sent to arbitration in accordance with an arbitration clause in the parties’ engagement agreement.”

In Sheppard, Mullin, “[t]he arbitrators ruled in the law firm’s favor and the superior court confirmed the award, but the Court of Appeal reversed. That court concluded that the matter should never have been arbitrated because, notwithstanding the broad conflict waiver in the engagement agreement, the law firm’s undisclosed conflict of interest violated rule 3-310(C)(3) of the Rules of Professional Conduct. This ethical violation, the court ruled, rendered the parties’ agreement, including the arbitration clause, unenforceable in its entirety. The Court of Appeal further held that the conflict of interest disentitled the law firm from receiving any compensation for the work it performed for the manufacturer while also representing the utility district in other matters.” (Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., supra, 6 Cal.5th at p. 68.) The California Supreme Court “agree[d] with the Court of Appeal that, under the framework established in Loving & Evans v. Blick (1949) 33 Cal.2d 603 [204 P.2d 23], the law firm’s conflict of interest rendered the agreement with the manufacturer, including its arbitration clause, unenforceable as against public policy. Although the manufacturer signed a conflicts waiver, the waiver was not effective because the law firm failed to disclose a known conflict with a current client.” (Ibid.)

Plaintiffs argue that “[h]ere, Defendants represented S+V pursuant to a written retainer agreement while simultaneously representing Kashani and Feldstein pursuant to an unwritten implied agreement. All three parties were asserting claims and defending counter claims in the underlying litigation. It follows that a joint representation conflict waiver was required because, from the outset of the representations, there was a significant risk Defendants’ representation of one client would be limited by the representation of another.” (Opp’n at p. 5:15-20.)

Defendants counter that the facts of Sheppard, Mullin are distinguishable from those here. The Court agrees. Defendants also note that Plaintiffs do not present any evidence via declaration or otherwise as to the nature of any purported conflict. In connection with the motion, Defendants provide the Declaration of Joan E. Kenegos, a partner of the Kaplan Firm. (Kaplan Decl., ¶ 1.) Ms. Kaplan states that “at no time did Mr. Kashani or anyone else on behalf of Salt+ Vinegar represent to me or any other member of my firm that an actual or potential conflict of interest existed by and amongst Salt + Vinegar, Mr. Kashani and/or Mr. Feldstein.” (Kenegos Decl., ¶ 3.)

Plaintiffs also note that California Rules of Professional Conduct, Rule 1.8.1 provides that “[a] lawyer shall not enter into a business transaction with a client, or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied:

(a) the transaction or acquisition and its terms are fair and reasonable to the client and the terms and the lawyer’s role in the transaction or acquisition are fully disclosed and transmitted in writing to the client in a manner that should reasonably have been understood by the client;

(b) the client either is represented in the transaction or acquisition by an independent lawyer of the client’s choice or the client is advised in writing to seek the advice of an independent lawyer of the client’s choice and is given a reasonable opportunity to seek that advice; and

(c) the client thereafter provides informed written consent to the terms of the transaction or acquisition, and to the lawyer’s role in it.”

Plaintiffs assert that “paragraph three of the retainer agreement confers a lien on the client’s recovery without meeting the requirements of the Rule 1.8.1…S+V was not advised in writing to seek the advice of independent counsel. That was required since a lien constitutes a pecuniary interest that is adverse to the client.” (Opp’n at p. 6:4-7.) It appears Plaintiffs are referring to the provision of the Retainer Agreement providing, “[a]ttorneys shall have a lien upon all causes of action, any judgments obtained thereon, and the proceeds of any recovery for their attorney’s fees and for any costs which they may have advanced in prosecuting Client’s claim.” (Kenegos Decl., ¶ 3, Ex. 1.)

Defendants assert that the lien provision does not invalidate the arbitration clause or the Retainer Agreement. Defendants note that Comment [1] to California Rules of Professional Conduct, Rule 1.8.1 provides, inter alia, that “[a] lawyer has an ‘other pecuniary interest adverse to a client’ within the meaning of this rule when the lawyer possesses a legal right to significantly impair or prejudice the client’s rights or interests without court action. (See Fletcher v. Davis (2004) 33 Cal.4th 61, 68 [14 Cal.Rptr.3d 58]; see also Bus. & Prof. Code, § 6175.3 [Sale of financial products to elder or dependent adult clients; Disclosure]; Fam. Code, §§ 2033-2034 [Attorney lien on community real property].) However, this rule does not apply to a charging lien given to secure payment of a contingency fee. (See Plummer v. Day/Eisenberg, LLP (2010) 184 Cal.App.4th 38 [108 Cal.Rptr.3d 455].)” (Emphasis added.) Defendants also assert that the ABA Model Rules of Professional Conduct provide guidance on this issue, specifically Mode Rules of Professional Conduct 1.8, which provides, inter alia, “(i) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may: (1) acquire a lien authorized by law to secure the lawyer’s fee or expenses; and (2) contract with a client for a reasonable contingent fee in a civil case.” (2018 Model Rules of Professional Conduct 1.8(i).)

Lastly, Plaintiffs note that California Rules of Professional Conduct, Rule 1.8.8, subdivision (a) provides that “[a] lawyer shall not: (a) Contract with a client prospectively limiting the lawyer’s liability to the client for the lawyer’s professional malpractice.” Plaintiffs argue that “[t]he arbitration provision at issue does not permit third party discovery. That effectively insulates Defendants’ from malpractice liability because third party discovery is necessary to prove the case within the case. The arbitration provision is therefore fundamentally contrary to public policy and is unenforceable.” (Opp’n at p. 6:18-21.)

The Court notes that the subject arbitration provision does not state that third party discovery is not permitted. Rather, the arbitration provision provides, “the dispute will be submitted to arbitration by, and in accordance with the rules of, Judicial Arbitration Mediation Services.” (Kenegos Decl., ¶ 3, Ex. A.) Plaintiffs do not challenge any specific Judicial Arbitration Mediation Services (“JAMS”) rules. In addition, Defendants cite to Sanchez v. Western Pizza Enterprises, Inc. (2009) 172 Cal.App.4th 154, 177, where the Court of Appeal “conclude[d] that the absence of express provisions requiring a written arbitration award and allowing discovery does not render the arbitration agreement unconscionable. Rather, those terms are implied as a matter of law as part of the agreement.”

Procedural unconscionability concerns the manner in which the contract was negotiated and the parties’ circumstances at that time. It focuses on the factors of oppression or surprise. ¿(Kinney v. United Healthcare Servs. (1999) 70 Cal.App.4th 1322, 1329¿¿¿.) “¿¿Oppression generally takes the form of a contract of adhesion, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.¿¿” (¿¿Carmona ¿v. Lincoln Millennium Car Wash, Inc. (2014) 226 Cal.App.4th 74, 84 [internal quotations omitted]¿¿¿.) Surprise occurs “¿¿where the allegedly unconscionable provision is hidden within a prolix printed form.¿¿” (¿¿Pinnacle ¿Museum Tower Assn. v. Pinnacle Market Development, LLC (2012) 55 Cal.4th 223, 247¿¿¿.)¿¿In addition, “[w]hen … there is no other indication of oppression or surprise, ‘the degree of procedural unconscionability of an adhesion agreement is low, and the agreement will be enforceable unless the degree of substantive unconscionability is high.’¿” (Serpa ¿v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 704¿¿¿.)¿¿

Here, Plaintiffs contend that the arbitration provision is procedurally unconscionable because “the arbitration provision was presented on a take it or leave it basis.” (Opp’n at p. 7:18.) However, Plaintiffs fail to provide any evidence in support of this assertion.

Plaintiffs also assert that the arbitration provision is procedurally unconscionable because

it fails to attach the applicable arbitration rules. As set forth above, the arbitration provision provides, inter alia, that “the dispute will be submitted to arbitration by, and in accordance with the rules of, Judicial Arbitration Mediation Services…” (Kenegos Decl., ¶ 3, Ex. 1.)

Here, Plaintiffs do not challenge any of the rules of Judicial Arbitration Mediation Services, so the Court finds that the failure to attach those rules does not affect the unconscionability analysis.

Plaintiffs also assert that “[t]he failure to inform Plaintiff of the disadvantages of limited discovery and large up-front arbitration costs is yet another factor that goes to procedural unconscionability.” (Opp’n at p. 8:12-13.) Plaintiffs cite to Harper v. Ultimo (2003) 113 Cal.App.4th 1402, 1406, where the Court of Appeal noted that “[p]rocedural unconscionability focuses on the factors of surprise and oppression, with surprise being a function of the disappointed reasonable expectations of the weaker party.” (Internal citation omitted.) Plaintiffs contend that “because the purported arbitration agreement does not attach any rules, Plaintiff had no means of realizing the provision imposed prohibitive costs and prejudicial discovery rights in the event of a dispute.” (Opp’n at p. 8:18-20.) But Plaintiffs fail to cite to any rule imposing such purported prohibitive costs and prejudicial discovery rights.

Based on the foregoing, the Court does not find that Plaintiffs have demonstrated that the arbitration provision is procedurally unconscionable.

“Substantive unconscionability pertains to the fairness of an agreement’s actual terms and to assessments of whether they are overly harsh or one-sided. A contract term is not substantively unconscionable when it merely gives one side a greater benefit; rather, the term must be so one-sided as to ‘shock the conscience.’” (Carmona v. Lincoln Millennium Car Wash, Inc., supra, 226 Cal.App.4th at p. 85 [internal quotations and citations omitted].) “[T]he paramount consideration in assessing [substantive] conscionability is mutuality.” (Ibid. [brackets in original].)

Plaintiffs assert that the “arbitration provision in the retainer agreements is unconscionable because of one-sided discovery restrictions.” (Opp’n at p. 8:25-26.) Plaintiffs cite to Aixtron, Inc. v. Veeco Instruments Inc. (2020) 52 Cal.App.5th 360, 370, where the Court of Appeal “construe[d] Code of Civil Procedure section 1282.6 and address[ed], as an issue of first impression, whether it granted the arbitrator broad powers to issue prehearing discovery subpoenas.” The Aixtron Court “conclude[d] that it did not and h[e]ld that the arbitrator’s discovery subpoena to Aixtron was not authorized under the CAA since the parties to the arbitration did not provide for full discovery rights in their arbitration agreement (§ 1283.1).” (Ibid.)[1]

Plaintiffs assert that “[i]n order to prevail on a legal malpractice claim, Plaintiff needs to prove that but for the malpractice it would have achieved a better outcome in the underlying litigation. This requires Plaintiff to retry the underlying case against LVRN. That, in turn, requires third party discovery and depositions from LVRN. Since Plaintiff bears the burden of proof, the lack of third-party discovery is overly harsh and one-sided as to Plaintiff.” (Opp’n at p. 9:18-22.)

Defendants assert that the lack of an express provision for discovery does not render the arbitration provision substantively unconscionable. As noted by Defendants, “the absence of express provisions requiring a written arbitration award and allowing discovery does not render the arbitration agreement unconscionable. Rather, those terms are implied as a matter of law as part of the agreement.” (Sanchez v. Western Pizza Enterprises, Inc., supra, at p. 177.)

Based on the foregoing, the Court finds that Plaintiffs have not met their burden of demonstrating that the Retainer Agreement is unenforceable due to unconscionability.

For the foregoing reasons, Defendants’ motion to compel arbitration is granted.

The entire action is stayed pending completion of arbitration of Plaintiffs’ arbitrable claims.

The Court sets an arbitration completion status conference on March 28, 2024, at 10:00 a.m. in Dept. 50. The parties are ordered to file a joint report regarding the status of the arbitration five court days prior to the status conference, with a courtesy copy delivered directly to Department 50.¿¿

[1]Code of Civil Procedure section 1283.1 provides, “(a) All of the provisions of Section 1283.05 shall be conclusively deemed to be incorporated into, made a part of, and shall be applicable to, every agreement to arbitrate any dispute, controversy, or issue arising out of or resulting from any injury to, or death of, a person caused by the wrongful act or neglect of another. (b) Only if the parties by their agreement so provide, may the provisions of Section 1283.05 be incorporated into, made a part of, or made applicable to, any other arbitration agreement.”

Superior Court of California

County of Los Angeles

Department 50