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Posts categorized "UCL - competitor actions"
New UCL Prop. 64 standing opinion: Two Jinn, Inc. v. Government Payment Service, Inc.
In Two Jinn, Inc. v. Government Payment Service, Inc., ___ Cal.App.4th ___ (Feb. 2, 2015), the Court of Appeal (First Appellate District, Division Four) addressed Prop. 64 standing in the context of a UCL competitor action, and affirmed the trial court's grant of summary judgment in the defendant's favor.
The plaintiff (Aladdin Bail Bonds) advanced a couple of standing arguments, each of which the Court rejected.
Aladdin contends that GPS's allegedly unfair business practices caused it economic injury when customers who would otherwise have used Aladdin's services used GPS's services instead. We disagree because the summary judgment evidence shows that any diversion of customers from Aladdin to GPS did not result from the fact that GPS does not have a bail bond license, or that it does not comply with other regulations governing the activities of licensed bail bond agents.
This part of the opinion stands in contrast to Glen Oaks Estates Homeowners Assn. v. Re/Max Premier Properties, Inc., 203 Cal.App.4th 913 (2012) (discussed in this blog post), which held that investigative costs are sufficient "injury in fact" to confer standing under Kwikset.
The opinion then goes on to hold that, even if the plaintiff did have standing, the defendant's conduct was neither "unlawful" nor "unfair" within the meaning of the UCL. Slip op. at 15-24.
The dockets were both updated Monday morning to show that the cases have been relisted and redistributed for conference on Friday, January 17, 2013 2014. Whirlpool Corp. v. Glaser, No. 13-431 (U.S.); Sears, Roebuck & Co. v. Butler, No. 13-430 (U.S.).
For more details on these cases, including links to the lower court opinions and some of the briefs, see this blog post.
In other news, the Court granted cert. in a case I've been following because the underlying action includes a UCL claim. POM Wonderful LLC v. The Coca Cola Co., No. 12-761 (U.S.). Before cert. was granted last Friday, the matter had been relisted once, and the Solicitor General was invited to file an amicus curiae brief, which it did in late November.
Whether the court of appeals erred in holding that a private party cannot bring a Lanham Act claim challenging a product label regulated under the Food, Drug, and Cosmetic Act.
Petitioner also brought claims under various California laws. Those claims are not at issue in this Court. See pet. 1. The district court granted summary judgment to respondent on those claims, No. 08-CV-6237, 2013 WL 543361 (C.D. Cal. Feb. 13, 2013), and petitioner's appeal is pending, No. 13-5570 (9th Cir).
Amicus Curiae Brief of United States at 5 n.2. In the cited decision, the district court held that the UCL claim was preempted by federal law.
SCOTUSblog's case page for this matter has links to more of the briefs.
In Law Offices of Mathew Higbee v. Expungement Assistance Services, ___ Cal.App.4th ___ (Mar. 14, 2013), the Court of Appeal (Fourth Appellate District, Division Three) held that Prop. 64 did not eliminate UCL actions brought against a competitor whose unlawful business practices were stealing away the plaintiff's customers, market share and profits.
To me, the issues raised in this case should have been no-brainers. Nothing in Prop. 64 suggested an intention by voters to elimimate UCL competitor actions, and after the Supreme Court's holdings in Clayworth and Kwikset, there should have been no doubt that a competitor who loses customers, market share and profits (that is, suffers monetary "injury in fact") because of the unfair competition of a competing business can bring a UCL action and seek injunctive relief.
Nevertheless, the defendant in Higbee argued that the plaintiff business competitor lacked Prop. 64 standing because it could allege no "direct" business dealings with the defendant. Slip op. at 2. The opinion approaches this argument as though it had some conceivable merit. It does not, as the opinion correctly concludes.
Higbee argues the allegation that EAS violated section 6125 et seq. (pertaining to the requirement of an active law license), section 6400 et seq. (pertaining to the registration and bonding of, and permissible activities of, legal document assistants), and Penal Code section 4852.2 (pertaining to the requirement of a law license for the handling of certain criminal matters), constituted an allegation of an unlawful business practice within the meaning of the UCL. He says he is entitled to base a UCL lawsuit on those statutes, citing Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th 553 (superseded in part by Prop. 64, as recognized in Californians for Disability Rights v. Mervyn’s, LLC, supra, 39 Cal.4th at p. 227).
Slip op. at 9-10 (footnotes omitted).
As a preliminary matter, the Court agreed that the UCL "borrows" violations of other laws and makes them independently actionable, and found "no reason why the alleged violations of statutes concerning the unauthorized practice of law cannot serve as a predicate for Higbee's UCL action." Id. at 9-12.
Next, the Court considered, and rejected, the defendant's argument that the plaintiff lacked post-Prop. 64 standing because it had not suffered the right type of injury. Id. at 12-20.
The operative complaint alleged that "as a result of EAS’s unauthorized practice of law, advertisement of illegal services, and representation that it could perform the same legal services as [plaintiff] did, he had been forced, in order to compete, to lower his prices and to expend more money on advertising, he had lost clients and revenue, and the value of his law firm had diminished." Id. at 13. The defendant argued that "a loss of market share is not the type of economic injury that qualifies as an injury in fact for the purposes of standing under the UCL. Id.
The Court of Appeal disagreed, citing, among other cases, Clayworth, Kwikset, Saunders v. Superior Court, 27 Cal.App.4th 832 (1994), Allergan, Inc. v. Athena Cosmetics, Inc., 640 F.3d 1377 (Fed. Cir. 2011) (discussed in this blog post), Pom Wonderful LLC v. Coca-Cola Co., 679 F.3d 1170 (9th Cir. 2012) (discussed here), and VP Racing Fuels, Inc. v. General Petroleum Corp., 673 F.Supp.2d 1073 (E.D. Cal. 2009). In Saunders, Allergan, and VP Racing, "the alleged injury was based on reduced market share." Slip op. at 16.
As we have observed, the original purpose of the unfair competition laws was to protect against “wrongful conduct in commercial enterprises which resulted in business loss to another, ordinarily by the use of unfair means in drawing away customers from a competitor.” (People ex rel. Mosk v. National Research Co. of Cal., supra, 201 Cal.App.2d at p. 770.) Although the UCL was ultimately expanded to provide equitable relief to consumers in addition to business competitors (ibid.), this does not mean that the UCL no longer protects business competitors (Kwikset Corp. v. Superior Court, supra, 51 Cal.4th at p. 320).
In the matter before us, we hold that Higbee, having alleged that he had been forced to pay increased advertising costs and to reduce his prices for services in order to compete, and that he had lost business and the value of his law practice had diminished, succeeded in alleging at least an identifiable trifle of injury as necessary for standing under the UCL.
Slip op. at 19-20 (emphasis added).
Finally, the Court reached the defendant's core argument that the plaintiff "cannot demonstrate standing to bring a UCL claim because he never engaged in any business dealings with EAS." Id. at 21. The defendant relied wholly on Clayworth, where the Supreme Court stated: "While the voters clearly intended to restrict UCL standing, they just as plainly preserved standing for those who had had business dealings with a defendant and had lost money or property as a result of the defendant’s unfair business practices." Id. (quoting Clayworth v. Pfizer, Inc., 49 Cal.4th 758, 788 (2010)).
The language of the UCL does not leave the court hamstrung, unable to even consider an action seeking injunctive relief just because the defendant engages in its purportedly unlawful activity via the Internet and has not had any direct business dealings with the plaintiff.
EAS’s citations to cases pertaining to the requirement to allege reliance in order to show causation in cases based on fraud (see, e.g., In re Tobacco II Cases (2009) 46 Cal.4th 298; Pfizer Inc. v. Superior Court (2010) 182 Cal.App.4th 622) do not convince us otherwise.
Id.; see also Medrazo v. Honda of North Hollywood, 205 Cal.App.4th 1 (2012) (discussing Supreme Court's Tobacco II footnote, which states that "there are doubtless many types of unfair business practices in which the concept of reliance, as discussed here, has no application") (see this blog post for more on Medrazo).
In the last sentence of the opinion, the Court of Appeal directed the clerk to forward a copy of the opinion to the Attorney General, presumably so that her office can take appropriate action against the defendant, perhaps including an action for civil penalties under the UCL. Slip op. at 25.
Congratulations to Mat Higbee, who represented himself in this case.
Bob Egelko of the San Francisco Chronicle had this article in yesterday's paper on the Court of Appeal's opinion last week in Law Offices of Mathew Higbee v. Expungement Assistance Services, ___ Cal.App.4th ___ (Mar. 14, 2013).
A state appeals court has reinstated a lawyer's suit against a company offering cut-rate legal services, ruling that - despite a voter-approved law limiting unfair-competition suits - a business that's being undercut by a rival's practices can still seek redress in court.
Ninth Circuit addresses UCL standing: Pom Wonderful LLC v. The Coca-Cola Co.
To have standing to bring a claim under the UCL, a private plaintiff must show that it “has suffered injury in fact and has lost money or property as a result of” unfair competition; to have standing under the FAL, a private plaintiff must make the same showing of injury and loss as a result of an FAL violation. Cal. Bus. & Prof’l Code §§ 17204, 17535. The district court interpreted the “lost money or property” language to require a plaintiff to show that it is entitled to restitution from the defendant—even if the plaintiff seeks only injunctive relief. That was error. The California Supreme Court has now made clear that standing under section 17204 (the UCL standing provision) does not depend on eligibility for restitution. See Kwikset Corp. v. Superior Ct., 246 P.3d 877, 895 (Cal. 2011); Clayworth v. Pfizer, Inc., 233 P.3d 1066, 1088 (Cal. 2010). We are inclined to interpret the materially identical language in section 17535 (the FAL standing provision) the same way. Nevertheless, because these cases came down after the district court entered judgment in this case, we will vacate the judgment as to Pom’s state law claims and remand to the district court to rule on standing in light of Kwikset and Clayworth.
This was a UCL competitor and Lanham Act case brought by Pom Wonderful against Coca-Cola over the labeling of the latter's "Pomegranate Blueberry" juice, which "contains about 99.4% apple and grape juices, 0.3% pomegranate juice, 0.2% blueberry juice, and 0.1% raspberry juice." Id. at 5248. In the first part of its analysis, the Ninth Circuit held that the federal Food, Drug and Cosmetic Act did not bar the Lanham Act claim. Id. at 5252-58.
New UCL competitor decision: Allergan, Inc. v. Athena Cosmetics,Inc.
The U.S. Court of Appeals for the Federal Circuit has handed down an opinion in a UCL competitor action. Allergan, Inc. v. Athena Cosmetics, Inc., ___ F.3d ___ (Fed. Cir. May 24, 2011). The case was commenced in the Central District of California, but the Federal Circuit had jurisdiction over the appeal because the case included patent claims. Slip op. at 7.
Here, Allergan has plainly alleged an economic injury that was the result of an unfair business practice. The unfair competition that Allergan alleges involves the defendants’ manufacture, marketing and/or sale of hair and eyelash growth products without a prescription, federal or state approval, and proper labeling in violation of federal and California laws. Allergan’s First Am. Compl. 9-14. As a result of these acts, Allergan alleges that it has “lost sales, revenue, market share, and asset value.” Id. at 14. Allergan’s complaint sufficiently alleges an injury that was caused by the defendants’ unfair business practices. Under Kwikset, this satisfies the requirements of section 17204, and therefore Allergan has standing to pursue its claim for relief under the UCL. See Kwikset, 246 P.3d at 894-95; Clayworth, 233 P.3d at 1087.
Id. at 11 (emphasis added). The district court had erroneously applied earlier Court of Appeal opinions, such as Citizens of Humanity, holding that only a restitutionary loss could create Prop. 64 standing. See id. at 6. UCL competitor actions are alive and well.
Proposition 64 did not add a “business dealings requirement” to standing under section 17204. The only amendment Proposition 64 made to section 17204 re-quired that a private person bringing an action pursuant to the UCL must have “suffered injury in fact and . . . lost money or property as a result of such unfair competition.” Cal. Prop. 64 § 3. Reading this amendment to encompass a business dealings requirement would contradict the plain language of the statute and improperly elevate one purpose of Proposition 64 over the language of the statute. See City of Chicago v. Envtl. Def. Fund, 511 U.S. 328, 337 (1994) (“[I]t is the statute, and not the [voter’s findings], which is the authoritative expression of the law . . . .”).
The defendants also argued that Kwikset approved of the business dealings requirement. Oral Arg. at 30:00-31:00, available at http://www.cafc.uscourts.gov/oral-argument-recordings/2010-1394/all. The crux of defendants’ argument is the introduction of Kwikset, which states that the purpose of Proposition 64 was to “eliminate standing for those who have not engaged in any business dealings with would-be defendants . . . .” 246 P.3d at 881. This argument disregards the focus of Kwikset, which held that the only requirements to establish standing under section 17204 are that (1) the plaintiff suffered an injury in fact from the loss of money or property; and (2) that this injury was caused by the defendant’s unfair business practice. Id. at 885.
Moreover, the defendants’ argument ignores that there are “innumerable ways” to show economic injury from unfair competition and that the Kwikset court did not “supply an exhaustive list of ways in which unfair competition may cause economic harm.” Id. at 886. While a direct business dealing is certainly one way in which a plaintiff could be harmed, the California courts have also recognized claims under the UCL where a direct business dealing was lacking. See, e.g., Overstock.com, Inc. v. Gradient Analytics, Inc., 151 Cal. App. 4th 688, 716 (Cal. Ct. App. 2007) (finding standing under section 17204 where plaintiff had plead that defendant’s unfair business practices—intentional dissemination of false negative reports—had “result[ed] in diminution in value of [plaintiff’s] assets and decline in its market capitalization and other vested interests”). Thus, standing under section 17204 is not restricted by a direct business dealings requirement. The only standing requirements under 17204 are those in the language of the statute and, as explained in I.B., Allergan has satisfied those requirements.
Slip op. at 12-13 (emphasis added).
It is unlawful for any person engaged in business within this State to sell any article or product at less than the cost thereof to such vendor, or to give away any article or product, for the purpose of injuring competitors or destroying competition.
Slip op. at 16. However, "section 17043 does not require an anticompetitive impact. '[A]n injurious effect is not an essential element of the violation. The violation is complete when sales below cost are made with the requisite intent and not within any of the exceptions.' (People v. Pay Less Drug Store (1944) 25 Cal.2d 108, 113–114 [153 P.2d 9].)" Id.
The main point of contention was over the defendant's asserted "recoupment defense," i.e., whether "'objectively reasonable probability of recouping' losses 'through later monopoly pricing' must be established by the plaintiff in a section 17043 action." Id. at 11. The Court of Appeal answered that question in the negative. Id. at 11-20.
The rest of the opinion focuses on several claims of instructional error and other issues.
New UCL competitor decision: Silvaco Data Systems v. Intel Corp.
Silvaco Data Systems v. Intel Corp., ___ Cal.App.4th ___ (Apr. 29, 2010) is a case for misappropriation of trade secrets in which the plaintiff also brought a UCL claim. See pp. 37-41 for the Sixth District's discussion of standing (which, strangely, makes no mention of Tobacco II, a case undoubtedly relevant to the discussion).
In Drum v. San Fernando Valley Bar Association, ___ Cal.App.4th ___ (Feb. 24, 2010), the Court of Appeal (Second Appellate District, Division Five) upheld a judgment entered after the defendant's demurrer to the plaintiff's UCL claim was sustained without leave to amend.
A voluntary bar association’s unilateral refusal to sell its membership list to any particular buyer, even if the association’s reason was to protect some of its members from price competition, is not an “unlawful, unfair or fraudulent business act or practice” under the UCL (§ 17200).
Id. at 5. The Court of Appeal also observed that plaintiff "did not allege that he lost or expended or was denied any money or property as the result of the Association’s refusal to sell him its membership mailing list," and therefore lacked Prop. 64 standing to bring the action. Id. at 4.
Recent Ninth Circuit UCL competitor decision: Sybersound Records, Inc. v. UAV Corp.
In Sybersound Records, Inc. v. UAV Corp., 517 F.3d 1137 (9th Cir. 2008), the Ninth Circuit construed the UCL in the context of a competitor action. The plaintiff, a producer of karaoke records, alleged that the defendant, a competing karaoke producer, falsely represented to its customers (who are "distributors and retailers that resell these records to the public") that all songs on their records are 100% licensed for copyright purposes. This conduct, the plaintiff alleged, gave the defendant a competitive advantage, and the plaintiff lost money as a result. Id. at 1141, 1152 & n.7. The district court dismissed the plaintiff's UCL claim, and the Ninth Circuit affirmed.
California’s statutory unfair competition laws broadly prohibit unlawful, unfair, and fraudulent business acts. Korea Supply Co., 63 P.3d at 943. Unlawful acts are “anything that can properly be called a business practice and that at the same time is forbidden by law . . . be it civil, criminal, federal, state, or municipal, statutory, regulatory, or court-made,” where court-made law is, “for example a violation of a prior court order.” Nat’l Rural Telecomm. Coop. v. DIRECTV, Inc., 319 F. Supp. 2d 1059, 1074 & n.22 (C.D. Cal. 2003) (quoting Smith v. State Farm Mut. Auto. Ins. Co., 113 Cal. Rptr. 2d 399, 414 (Ct. App. 2001); Saunders v. Superior Court, 33 Cal. Rptr. 2d 438, 441 (Ct. App. 1994)) (internal quotations omitted). Unfair acts among competitors means “conduct that threatens an incipient violation of an antitrust law, or violates the spirit or policy of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.” Cel-Tech Commc’ns, Inc. v. L.A. Cellular Tel. Co., 973 P.2d 527, 544 (Cal. 1999). Finally, fraudulent acts are ones where members of the public are likely to be deceived. Nat’l Rural Telecomm. Coop., 319 F. Supp. 2d at 1077-78.
We first address the claims based on contracts and misrepresentations to which Sybersound was not a party, namely the misrepresentations to the Customers and copyright holders about payment of royalties and licenses, which sound in contract law. Under the sweeping standing provisions of California’s UCL, “[s]ection 17200 does not require that a plaintiff prove that he or she was directly injured by the unfair practice or that the predicate law provides for a private right of action.” Gregory v. Albertson’s Inc., 128 Cal. Rptr. 2d 389, 392 (Ct. App. 2002). “[A] breach of contract may form the predicate for a section 17200 claim, provided it also constitutes conduct that is unlawful, or unfair, or fraudulent.” Nat’l Rural Telecomm. Coop., 319 F. Supp. 2d at 1074 (internal quotation and citation omitted). Sybersound, however, has not pled that the breaches of contract are independently unlawful, unfair, or fraudulent, merely that the Corporation Defendants do not pay royalties or acquire licenses from other co-owners, in breach of their contracts with licensors and the Customers.
Because the unfair competition claim is based upon the misrepresentations that occurred in separate business relationships among karaoke records producers, licensors, and the Customers, the court would be placed in the awkward situation of enforcing private contracts among sophisticated parties who are not all parties to this lawsuit. See Gregory, 128 Cal. Rptr. 2d at 396 (dismissing a UCL claim and noting that the specific remedy sought under the UCL would “cause the court to assume the roles of real estate broker or property manager . . . [and] require the court to make competitive business judgments.” (internal quotation omitted)).
In this case, forcing “Defendants to fully license their products” and enforcing sales and royalties contracts through this litigation may “leave victims worse off than they would be if they filed individual actions against [defendants].” Rosenbluth Int’l, Inc. v. Superior Court, 124 Cal. Rptr. 2d 844, 847 (Ct. App. 2002) (dismissing a UCL claim that was based on a contract where the public in general was not harmed by the defendant’s unlawful practices, but where the victims of the unlawful actions were sophisticated corporations that negotiated their individual contracts with defendants). Courts are institutionally ill-suited to enforce and superintend private contracts among business entities where the concerned entities themselves are not parties to the suit.
Sybersound’s allegations that [the defendants] falsely told the Customers that Sybersound’s karaoke recordings infringed on copyrights also fail to state a claim. Since Sybersound cannot state a claim under the Lanham Act or the Copyright Act and has not pled any other unlawful acts under which this claim would fall, it cannot meet the unlawful conduct prong of the UCL. Moreover, Sybersound has also not pled an act that would be an incipient violation of antitrust law, as required under Cel-Tech for claims against competitors. Finally, Sybersound has not pled that these misrepresentations are likely to deceive members of the general public.
Accordingly, we conclude that the UCL claim was also properly dismissed by the district court.
Id. This opinion's approach to the UCL is much more conservative than that of another Ninth Circuit panel in a case handed down just two months later. Williams v. Gerber Products Co., 523 F.3d 934 (9th Cir. 2008) (discussed in this blog post).
On May 14, 2008, the Recorder reported on a new UCL competitor action filed by Craigslist against eBay. Zusha Elinson, "Craigslist Fires Back at eBay," The Recorder (May 14, 2008) (subscription). The complaint, filed in San Francisco Superior Court on May 13, 2008, is very detailed and quite interesting. It separately alleges violations of the "unlawful" and "unfair" prongs, and asserts violations of certain common-law rules (as well as various statutes) as the basis for the "unlawful" prong claim. Complaint at pp. 15-19. It correctly alleges the post-Cel-Tech formulation of the "unfair" prong (which governs competitor actions). Id. at 16-17.
On May 19, 2008, the Daily Journal reported that "Craigslist and eBay Vie for Edge in Venue" (subscription). The Daily Journal article reports that by the time Craiglist filed suit in San Francisco Superior Court (on May 13), eBay had already sued Craigslist in Delaware Chancery Court (on April 30). "'It's a corporate blood war,' said Fred Lambert, a professor at UC Hastings College of the Law who is an expert on corporations and securities law."
"SF Weekly penalty could rise to $15.6 million"
Judge Marla Miller of San Francisco Superior Court said she believes she's required under state law to increase the damages and issue an injunction in light of the jury's March 5 verdict that the SF Weekly, part of a national chain of alternative newspapers, cut its advertising rates below its costs to undermine the locally owned Guardian.
The jury awarded $6.3 million to the Guardian for its losses. Miller, in what she described as a tentative decision, said Friday she would triple the portion of those damages that equals one year of losses, bringing the total to $15.6 million, and prohibit the Weekly from selling below-cost ads in order to hurt the Guardian.
My prior post on this interesting Unfair Practices Act (and UCL) case is here. Business & Professions Code section 17082 requires trebling of any damages award in a UPA case ("any plaintiff in any such action shall be entitled to recover three times the amount of the actual damages, if any, sustained by the plaintiff"). It is unclear why the trebling would be limited to "one year of losses," however.
UPDATE: On May 20, 2008, the Daily Journal reported that "Judge Increases Jury Award for S.F. Newspaper" (subscription). According to the article, Judge Miller trebled the damages to $15.6 million and "issued a 10-year injunction forbidding SF Weekly, the Guardian's competitor and the defendant in the unfair competition case, from selling display advertisements below cost."
The Recorder also posted a copy of the jury verdict. It is unclear from the article whether a UCL claim was also pleaded, but my guess would be yes. That claim would be decided by the judge, not the jury. The jury's finding that the defendant violated the UPA probably compels the judge to also find a violation of the UCL's "unlawful" prong. It is doubtful, however, that any monetary relief that the UCL might afford would exceed the damages that the jury already awarded. If the judgment is appealed, the case is sure to be an interesting one to follow.
The San Francisco Chronicle also reports that "Bay Guardian wins suit with SF Weekly." In that article, a lawyer for SF Weekly is quoted as saying that an appeal is planned.
UPDATE: In an article in which I am quoted, Competition Law 360 reports that "$15.6M Awarded In San Francisco Newspaper Clash" (March 6, 2008) (subscription).
UCL decision from last May: Overstock.com, Inc. v. Gradient Analytics, Inc.
Somehow I missed the Court of Appeal's opinion in Overstock.com, Inc. v. Gradient Analytics, Inc., 151 Cal.App.4th 688 (2007), which the First Appellate District, Division Four handed down on May 30, 2007.
Overstock.com was decided in the context of an anti-SLAPP motion and contains several noteworthy rulings relating to the UCL. First, the Court of Appeal determined that conduct "likely to deceive a reasonable consumer" was actionable under the UCL even if the reasonable consumer is someone other than the plaintiff — in this case, potential investors in the plaintiff's stock. Overstock.com, 151 Cal.App.4th at 714.
"The UCL contains no language supporting an exclusion for securities, and under the plain language of the UCL, we cannot create such an exclusion." .... Indeed the sweeping language of the UCL is intended " ' to permit tribunals to enjoin on-going wrongful business conduct in whatever context such activity might occur.' "
The Court also noted that "the California UCL contains no directive to interpret our consumer protection statute consistently with the FTC Act." Id. at 715. This holding tends to undermine Camacho v. Automobile Club of Southern California, 142 Cal.App.4th 1394, 1403 (2006), in which the Court of Appeal relied on the FTC Act in adopting a third formulation of the UCL's "unfair" prong.
Finally, the Court of Appeal held that the plaintiff satisified the Prop. 64 "injury in fact" requirement by alleging that the defendant's unfair, unlawful and fraudulent conduct "result[ed] in diminution in value of its assets and decline in its market capitalization and other vested interests. This meets the statutory requirement of 'injury in fact' resulting from defendants' misconduct." Overstock.com, 151 Cal.App.4th at 716. This holding is directly contrary to at least one federal decision, Walker v. USAA Casualty Ins. Co., 474 F.Supp.2d 1168 (E.D. Cal. 2007), in which the court held that to qualify as "injury in fact," the monetary loss must also be recoverable as "restitution" under the UCL. As I have explained before, that holding seemed to me contrary to the plain language of Prop. 64, and Overstock.com confirms this.
I've had limited time to read or analyze these decisions. Time permitting, I will post more about them later on.
New UCL competitor action: Stevenson Real Est. Servs. v. CB Richard Ellis Real Est. Servs.
In Stevenson Real Estate Servs., Inc. v. CB Richard Ellis Real Estate Servs., Inc., ___ Cal.App.4th ___ (Apr. 26, 2006), the complaint attempted to plead a cause of action for intentional interference with prospective economic advantage, using an alleged UCL violation as the "independently wrongful act" required to plead that cause of action under Korea Supply Co. v. Lockheed Martin Corp., 29 Cal.4th 1134 (2003). Slip op. at 3-4. To count as an "independently wrongful act," the conduct must be "proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” Id. at 5 (citing Korea Supply, 29 Cal.4th at 1159). The Court of Appeal (Second Appellate District, Division Eight) held that the trial court properly granted judgment on the pleadings because the complaint did not adequately allege a violation of the UCL's "unfair" prong as interpreted in Cel-Tech Communications, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal.4th 163, 187 (1999), which governs competitor actions. Slip op. at 10-11. The opinion seems to assume that the "fraudulent" prong does not apply to competitor actions. See id. at 11 n.4. Nor was the "unlawful" prong mentioned — presumably because if the plaintiff could have alleged some other violation of law, it would not have needed to rely on the UCL to state a claim for intentional interference with prospective economic advantage.
RLH Industries, Inc. v. SBC Communications, Inc., ___ Cal.App.4th ___ (Nov. 3, 2005) (Fourth Appellate District, Division Three) is another recent UCL opinion in an action between competitors. Like Eddins v. Sumner Redstone, ___ Cal.App.4th ___ (Nov. 22, 2005), discussed in the post immediately below, it involved a Cartwright Act claim and construed Chavez v. Whirlpool Corp., 93 Cal.App.4th 363 (2001). The Court of Appeal applied the Cel-Tech formulation of "unfair," holding that "nothing suggests [the defendant's challenged] policy 'threatens an incipient violation' of the Cartwright Act, violates its policy or spirit, or otherwise threatens competition. .... Even if some unfair competition causes of action can survive independently of an actual antitrust violation, this one does not." Slip op. at 8-9 (citing Chavez, 93 Cal.App.4th at 375). The Court of Appeal affirmed the trial court's order granting summary judgment to one of the two defendants.
As for the other defendant, summary judgment should not have been granted. The Court of Appeal rejected that defendant's argument that the United States Constitution's dormant commerce clause bars UCL and antitrust claims against an out-of-state defendant for out-of-state anticompetitive conduct that impacts Californians. Slip op. at 14-16.
In Eddins v. Sumner Redstone, ___ Cal.App.4th ___ (Nov. 22, 2005), the Court of Appeal (Second Appellate District, Division Eight) construed the UCL's "unlawful" prong in the context of an action between business competitors. The Court determined that the trial court properly granted summary adjudication of the plaintiffs' Cartwright Act claim, but erred in also granting summary adjudication of the UCL claim. The trial court relied on Chavez v. Whirlpool Corp., 93 Cal.App.4th 363, 375 (2001), which held that conduct is not "unfair" within the meaning of the UCL if it is "deemed reasonable and condoned under the antitrust laws." Citing Cel-Tech, the Court of Appeal found that Chavez only applies to a UCL "unlawful" prong claim predicated on the Cartwright Act, but not to a UCL "unfair" prong claim. I've always thought that this aspect of Chavez was inconsistent with Cel-Tech, so it's nice to see another panel decline to follow it.
Last Thursday, the Court of Appeal (Second Appellate District, Division Two) handed down People's Choice Wireless, Inc. v. Verizon Wireless, ___ Cal.App.4th ___ (July 28, 2005), and held that the trial court properly sustained the defendant's demurrer to the plaintiff's UCL claim. Because it was an action between competitors, the Court applied the post-Cel-Tech formulation of "unfair." This case probably represents the most detailed exposition of the post-Cel-Tech formulation in a competitor action since Cel-Tech itself was decided.

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New York State Tax Commission sought to include the accumulated DISC income, computing appellant's taxable income by first combining all of Westinghouse Export's income with that of appellant, and then giving appellant the benefit of the DISC export credit for the 5% of Westinghouse Export's receipts each year that could be attributed to New York shipments. The Commission denied relief on appellant's petition for redetermination of the resulting tax deficiencies. Ultimately, after appellant had mixed success in the Appellate Division of the New York Supreme Court on its federal constitutional challenges to the New York taxing scheme, the New York Court of Appeals reinstated the Tax Commission's determination. Rejecting appellant's claim that the tax credit impermissibly subjected its export sales from a non-New York place of business to a higher tax rate than that on comparable sales shipped from a regular place of business in New York, the court held that the tax credit simply forgives a portion of the tax New York has a right to levy, such portion being determined by reference to shipments of export property from a regular place of business in New York, that this method satisfied due process, and that any effect on interstate commerce was too indirect to violate the Commerce Clause.
Held: The manner in which New York allows corporations a tax credit on the accumulated income of their subsidiary DISCs discriminates against export shipping from other States, in violation of the Commerce Clause. Pp. 466 U. S. 398-407.
(a) It is the second adjustment of the credit to reflect the DISC's New York export ratio, made only to the credit and not to the base taxable income figure, that has the effect of treating differently parent corporations that are similarly situated in all respects except for the percentage of their DISCs' shipping activities conducted from New York. This adjustment allows a parent a greater tax credit on its accumulated DISC income as its subsidiary DISC moves a greater percentage of its shipping activities into New York. Conversely, the adjustment decreases the tax credit allowed to the parent for a given amount of its DISC's shipping activities conducted from New York as the DISC increases its shipping activities in other States. Thus, the New York tax scheme not only provides an incentive for increased business activity in New York, but also penalizes increases in the DISC's shipping activities in other States. Pp. 466 U. S. 399-401.
by means of taxing measures that invite a multiplication of preferential trade areas within the United States, in contravention of the Commerce Clause. Whether the New York tax diverts new business into the State or merely prevents current business from being diverted elsewhere, it is still a discriminatory tax that "forecloses tax-neutral decisions and . . . creates . . . an advantage" for firms operating in New York by placing "a discriminatory burden on commerce to its sister States." Boston Stock Exchange v. State Tax Comm'n, 429 U. S. 318, 429 U. S. 331. Pp. 466 U. S. 402-407.
55 N.Y.2d 364, 434 N.E.2d 1044, reversed. BLACKMUN, J., delivered the opinion for a unanimous Court.
current basis, whether or not that portion is actually paid or distributed to them. § 995. Under the statutory provisions in effect during the calendar years 1972 and 1973 (the tax years in question in this case), 50% of a DISC's income was deemed distributed to its shareholders. 85 Stat. 544. [Footnote 3] Taxes on the remaining income of the DISC -- labeled "accumulated DISC income" -- are deferred until either that accumulated income is actually distributed to the shareholders or the DISC no longer qualifies for special tax treatment. § 996 of the Code, 26 U.S.C. § 996.
(the DISC's New York export ratio) by the parent's New York business allocation percentage; [Footnote 5] (3) multiplying that product by the New York tax rate applicable to the parent; (4) multiplying that product by 70%; and (5) multiplying that product by the parent's attributable share of the accumulated income of the DISC for the year. §§ 210.13(a)(2) to (5).
Westinghouse Export. [Footnote 6] In 1973, the income of Westinghouse Export was approximately $58 million; Westinghouse reported almost $30 million of that amount as deemed distributed income. [Footnote 7] Westinghouse, however, did not include the DISC's accumulated income in its consolidated returns.
The appellees, as the New York State Tax Commission (Tax Commission), sought to include in Westinghouse's consolidated income the accumulated DISC income; that is, the Tax Commission computed Westinghouse's taxable income by first combining all of Westinghouse Export's income with that of Westinghouse, pursuant to N.Y.Tax Law § 208.9(i) (B) (McKinney Supp.1983-1984). The Commission gave Westinghouse the benefit of the DISC export credit for the approximately 5% of Westinghouse Export's receipts each year that could be attributed to New York shipments. [Footnote 8] After applying the relevant allocation and tax percentages, the Tax Commission asserted deficiencies in Westinghouse's franchise tax of $73,970 (later corrected to $71,970) plus interest for 1972 and $151,437 plus interest for 1973. App. 42, 46.
the Commerce and Due Process Clauses of the United States Constitution. Westinghouse further contended that limiting the tax benefit of the DISC export credit to gross receipts from shipments attributable to a New York place of business violated the Commerce, Due Process, and Equal Protection Clauses. The Commission declined to entertain Westinghouse's contentions, on the ground that, as an administrative agency, it lacked jurisdiction to pass upon "the constitutionality of the laws of the State of New York." Id. at 47.
Westinghouse then brought suit in the New York Supreme Court for review of the tax determination, again raising its constitutional claims. The case was transferred to the Appellate Division. That court, by a 3-to-2 vote, found the portion of the law that requires accumulated income of the DISC to be added to the consolidated return, § 208.9(i)(B), to be an unconstitutional burden on foreign commerce. 82 App.Div.2d 988, 440 N.Y.S.2d 397 (1981). The Appellate Division based its holding on the fact that Congress intended to exempt DISC income from current taxation. Id. at 989, 440 N.Y.S.2d at 399-400. This decision made it unnecessary for the court to consider the constitutionality of New York's geographical limitation on the DISC export credit, because the credit applies only to accumulated DISC income. The Appellate Division, however, went on to reject Westinghouse's constitutional challenges to New York's taxation of deemed distributed income. Ibid., 440 N.Y.S.2d at 400.
not preempt a State from taxing a DISC. Id. at 372-373, 434 N.E.2d at 1047-1048. The court also rejected Westinghouse's argument that the State lacked the jurisdictional nexus necessary to satisfy the minimal due process standards on which the right to tax must be predicated. Finally, the court rejected Westinghouse's claim that the credit provided for in § 210.13(a) impermissibly subjected Westinghouse's export sales from a non-New York place of business to a higher tax rate than that on comparable sales shipped from a regular place of business in New York. The court noted that the credit was devised by the State to provide shareholders of DISCs with state tax incentives akin to those enacted by Congress. The only difference was that, while Congress had chosen to provide the benefit in the form of a tax deferral, the New York Legislature had elected to use a credit. Id. at 374-376, 434 N.E.2d at 1049-1050.
The court acknowledged that the credit was intended to ensure that New York would not lose its competitive position vis-a-vis other States, since other States were also expected to offer tax benefits to DISCs. It traced the steps required in calculating the tax credit and concluded: "Obviously, the business allocation percentage plays an integral role in computing the tax credit." Id. at 375, 434 N.E.2d at 1050. Use of the business allocation percentage, the court reasoned, ensures that, in taxing DISC income, the State is taxing only that DISC income that has a jurisdictional nexus with the State. The credit simply forgives a portion of the tax New York has a right to levy. Id. at 376, 434 N.E.2d at 1050. The portion of the tax to be forgiven is determined by reference to shipments of export property from a regular place of business in New York. The court was of the opinion that this method satisfies due process, and that any effect on interstate commerce is too indirect to run afoul of the Commerce Clause. Ibid. .
U.S. 1144 (1983), and we now reverse the judgment of the New York Court of Appeals in that respect.
The Tax Commission seeks to convince us that the DISC tax credit forgives merely a portion of the tax that New York has jurisdiction to levy. All the accumulated income of a DISC is attributed to its parent for tax purposes. Under unitary tax principles, however, if the parent has a regular place of business outside New York, the State will not actually tax the full amount of the accumulated income. Only a portion of the parent's net income (which includes the accumulated DISC income) will be subject to tax in New York. That portion is determined by reference to a business allocation percentage determined by averaging the percentages of in-state property, payroll, and receipts. See N.Y.Tax Law § 210.3 (McKinney Supp.1983-1984). This Court long has upheld, subject to certain restraints, the use of a formula apportionment method to determine the percentage of a business' income taxable in a given jurisdiction. Container Corp. v. Franchise Tax Board, 463 U. S. 159, 463 U. S. 169-171 (1983); see Illinois Central R. Co. v. Minnesota, 309 U. S. 157 (1940); Hans Rees' Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U. S. 123 (1931); Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm'n, 266 U. S. 271 (1924); Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113 (1920).
process releases the State from the constitutional restraints that limit the way in which it exercises its taxing power over the income within its jurisdiction.
Here, Westinghouse argues that the State of New York has sought to exercise its taxing power over accumulated DISC income in a manner that offends the Commerce Clause and the Equal Protection Clause of the Fourteenth Amendment. This challenge is not foreclosed by our holding that New York's allocation of DISC income is constitutionally acceptable. See 459 U.S. 1144 (1983) (dismissing for want of a substantial federal question Westinghouse's challenge to method of allocating DISC income to parent). "Fairly apportioned" and "nondiscriminatory" are not synonymous terms. It is to the question whether the method of allowing the credit is discriminatory in a manner that violates the Commerce Clause that we now turn.
"provide a positive incentive for increased business activity in New York State," Budget Report, at 18, but also it penalizes increases in the DISC's shipping activities in other States.
"'the Commerce Clause was not merely an authorization to Congress to enact laws for the protection and encouragement of commerce among the States, but by its own force created an area of trade free from interference by the States. . . . [T]he Commerce Clause, even without implementing legislation by Congress, is a limitation upon the power of the States,'"
"[n]o State, consistent with the Commerce Clause, may 'impose a tax which discriminates against interstate commerce . . . by providing a direct commercial advantage to local business.'"
Boston Stock Exchange, 429 U.S. at 429 U. S. 329, quoting Northwestern States Portland Cement Co. v. Minnesota, 358 U. S. 450, 358 U. S. 458 (1959). See also Halliburton Oil Well Cementing Co. v. Reily, 373 U. S. 64 (1963); Nippert v. Richmond, 327 U. S. 416 (1946); I. M. Darnell & Son Co. v. Memphis, 208 U. S. 113 (1908); Guy v. Baltimore, 100 U. S. 434 (1880); Welton v. Missouri, 91 U. S. 275 (1876).
"'much room for controversy and confusion and little in the way of precise guides to the States in the exercise of their indispensable power of taxation.'"
Boston Stock Exchange, 429 U.S. at 429 U. S. 329, quoting Northwestern States, 358 U.S. at 358 U. S. 457. In light of our decision in Boston Stock Exchange, however, we think that there is little room for such "controversy and confusion" in the present litigation. The lessons of that case, as explicated further in Maryland v. Louisiana, 451 U. S. 725 (1981), are controlling.
encouraged the development of local industry by means of taxing measures that imposed greater burdens on economic activities taking place outside the State than were placed on similar activities within the State. In Maryland v. Louisiana, the Court held that Louisiana's "First-Use" tax -- which imposed a tax on natural gas brought into the State while giving local users a series of exemptions and credits -- violated the Commerce Clause because it "unquestionably discriminate[d] against interstate commerce in favor of local interests." 451 U.S. at 451 U. S. 756. Similarly, in Boston Stock Exchange, the Court held unconstitutional a New York stock transfer tax that reduced the tax payable by nonresidents when the tax involved an in-state (rather than an out-of-state) sale, and applied a maximum limit to the tax payable on any in-state (but not out-of-state) sale. See 429 U.S. at 429 U. S. 332. The stock transfer tax was declared unconstitutional because it violated the principle that "no State may discriminatorily tax the products manufactured or the business operations performed in any other State." Id. at 429 U. S. 337. The tax schemes rejected by this Court in both Maryland v. Louisiana and Boston Stock Exchange involved transactional taxes, rather than taxes on general income. That distinction, however, is irrelevant to our analysis. The franchise tax is a tax on the income of a business from its aggregated business transactions. It cannot be that a State can circumvent the prohibition of the Commerce Clause against placing burdensome taxes on out-of-state transactions by burdening those transactions with a tax that is levied in the aggregate -- as is the franchise tax -- rather than on individual transactions.
indistinguishable from one that would apply to New York shipments a tax rate that is 30% of that applied to shipments from other States. [Footnote 10] We have declined to attach any constitutional significance to such formal distinctions that lack economic substance. See, e.g., Maryland v. Louisiana, 451 U.S. at 451 U. S. 756 (tax scheme imposing tax at uniform rate on in-state and out-of-state sales held to be unconstitutional because discrimination against interstate commerce was "the necessary result of various tax credits and exclusions" that benefited only in-state consumers of gas).
The Tax Commission contends that the DISC export credit is a subsidy to American export business generally, and as such, is consistent with congressional intent in establishing DISCs and with the Commerce Clause. We find no merit in this argument. While the Federal Government may seek to increase domestic employment and improve our balance of payments by offering tax advantages to those who produce in the United States, rather than abroad, a State may not encourage the development of local industry by means of taxing measures that "invite a multiplication of preferential trade areas" within the United States, in contravention of the Commerce Clause. Dean Milk Co. v. Madison, 340 U. S. 349, 340 U. S. 356 (1951). We note also that, if the credit were truly intended to promote exports from the United States in general, there would be no reason to limit it to exports from within New York.
"is incorporated under the laws of any State and satisfies the following conditions for the taxable year:"
"(A) 95 percent or more of the gross receipts (as defined in section 993(f)) of such corporation consist of qualified export receipts (as defined in section 993(a)),"
"(B) the adjusted basis of the qualified export assets (as defined in section 993(b)) of the corporation at the close of the taxable year equals or exceeds 95 percent of the sum of the adjusted basis of all assets of the corporation at the close of the taxable year,"
"(C) such corporation does not have more than one class of stock and the par or stated value of its outstanding stock is at least $2,500 on each day of the taxable year, and"
"the qualified export receipts of a corporation are --"
"(A) gross receipts from the sale, exchange, or other disposition of export property,"
"(B) gross receipts from the lease or rental of export property, which is used by the lessee of such property outside the United States,"
"(C) gross receipts for services which are related and subsidiary to any qualified sale, exchange, lease, rental, or other disposition of export property by such corporation,"
"(D) gross receipts from the sale, exchange, or other disposition or qualified export assets (other than export property),"
"(E) dividends (or amounts includible in gross income under section 951) with respect to stock of a related foreign export corporation (as defined in subsection (e)),"
"(F) interest on any obligation which is a qualified export asset,"
"(G) gross receipts for engineering or architectural services for construction projects located (or proposed for location) outside the United States, and"
Subsequent to the tax years in question, the law governing DISCs was changed to decrease the amount of DISC income given preferential treatment. The Tax Reform Act of 1976, Pub.L. 94-455, § 1101(a), 90 Stat. 1655, limited DISC benefits to taxable income attributable to gross receipts in excess of 67% of the average export gross receipts in a 4-year base period. DISCs with adjusted taxable income of $100,000 or less are exempt from that provision. §§ 995(e)(3) and (f) of the Code, 26 U.S.C. §§ 995(e)(3) and (f). The Tax Equity and Fiscal Responsibility Act of 1982 Pub.L. 97-248, § 204(a), 96 Stat. 423, increased from 50% to 57.5%, for tax years beginning in 1983, the portion of DISC income deemed distributed to the DISC's shareholders. § 291(a)(4) of the Code, 26 U.S.C. § 291(a)(4).
The State considered two possible methods of DISC taxation. Under the first, a DISC would be taxed directly on its income. Use of this method would encourage formation of DISCs outside the State, so that New York would obtain no tax revenue from them. A direct tax on DISCs would also engender administrative costs. In general, New York uses federal taxable income as the base from which to determine income taxable by the State. Since a DISC would have no federal taxable income, a method of determining a DISC's taxable income for state tax purposes would have to be devised. Budget Report at 18.
A corporation's business allocation percentage for New York tax purposes is computed according to a formula set forth in N.Y.Tax Law § 210.3 (McKinney Supp.1983-1984). The percentage is, basically, the average of the percentages of the corporation's property situated, income earned, and payroll distributed within the State.
The Tax Commission was willing to allow Westinghouse a $2,569.77 credit for the 4.771297% of Westinghouse Export's 1972 receipts attributable to goods shipped from New York ports, and a $6,098.22 credit for the 5.523182% of the DISC's 1973 receipts attributable to New York shipments. Id. at 46.
The DISC credit allowed is computed by multiplying the percentage of the DISC's export revenues derived from New York shipments (100%, 50% or 0%) by the parent's New York business allocation percentage (40%); multiplying that product by the parent's New York tax rate (10%); multiplying that product by the credit percentage (70%); and, finally, multiplying that product by the amount of the accumulated DISC income attributable to the parent ($500).
"hold that a State may not compete with other States for a share of interstate commerce; such competition lies at the heart of a free trade policy. We hold only that, in the process of competition, no State may discriminatorily tax the products manufactured or the business operations performed in any other State."
429 U.S. at 429 U. S. 336-337.
In an attempt to illustrate the insignificance of the size and practical effect of the credit at issue, the Tax Commission reminds us that rejection of the credit will have little effect on Westinghouse's tax bill for 1972 and 1973. In fact, in the absence of the credit, Westinghouse will owe approximately $8,500 more to the State of New York. See n 8, supra; Tr. of Oral Arg. 20. This amount appears insignificant when compared to Westinghouse's New York tax bill of approximately $1 million for the 1972-1973 period. See ibid. Although the extent of the discrimination does not affect our analysis, we note that the controversy here is hardly over a de minimis amount when considered from the perspective of the amount of credit Westinghouse forwent because its DISC shipped the majority of its goods from ports outside New York. Westinghouse received $8,500 in credit because only 5% of its DISC's exports were shipped from New York. A similarly situated corporation whose DISC had conducted 100% of its export shipping from New York would have received a credit of approximately $170,000.


Richard Cassidy of Rich Cassidy Law, South Burlington, and Michael Palmer, Middlebury, for Plaintiffs-Appellants.
Chandler W. Matson, Stowe, for Defendants-Appellees.
¶ 1. ROBINSON, J. The critical question in this case is whether a party who participates extensively and without objection in an arbitration proceeding for nearly seven months prior to the actual arbitration hearing waives an objection to the validity of the arbitration agreement. Lesley Adams, William Adams, and Adams Construction VT, LLC (collectively Adams Construction) appeal the trial court’s denial of their application to vacate an arbitration award in favor of Russell Barr and the Barr Law Group (collectively Barr Law Group) and against Adams Construction. Because we conclude that Adams Construction waived its challenge to the validity of the arbitration agreement, we affirm.
¶ 2. The procedural history of this case is not disputed.1 On February 24, 2016, Barr Law Group filed a demand for arbitration against Adams Construction with the American Arbitration Association claiming that Adams Construction had failed to pay Barr Law Group more than $40,000 in fees for legal services. On March 8, 2016, Adams Construction filed an answer denying all claims and counterclaimed for $97,000, alleging various breaches by Barr Law Group. Both parties actively participated in the arbitrator selection process, submitting their objections and preferred arbitrators. Both parties participated in preliminary conferences. Barr Law Group requested a one-day hearing for its claims on the merits; Adams Construction requested three. The arbitrator scheduled the matter for a three-day hearing.
¶ 3. Over the next five months, the parties engaged in reciprocal discovery and motions practice. Adams Construction served over thirty discovery requests on Barr Law Group, and responded to sixty discovery requests from Barr Law Group, followed by at least two sets of supplemental responses to a substantial number of questions. Barr Law Group served its own discovery requests on Adams Construction and responded to Adams Construction’s requests. In addition, Adams Construction conducted an in-person inspection of records held by Barr Law Group at the Barr Law Group offices. Both parties filed motions and responses relating to discovery disputes and Barr Law Group’s multiple requests to dismiss Adams Construction’s counterclaims for lack of evidence. And they both participated in at least one telephonic case management conference during which the arbitrator ruled on various pending discovery and procedural matters.
arbitration proceeding. Adams Construction argued, for the first time, that the arbitration provision in Adams Construction’s fee agreement with Barr Law Group was unenforceable. Adams Construction cited legal authority from Vermont and across the country suggesting that an attorney’s fiduciary duty and ethical obligations require that the lawyer take certain steps to ensure that a client’s consent to a pre-dispute, binding arbitration agreement is fully informed. These steps may include fully disclosing the risks of binding, pre-dispute arbitration clauses, identifying the legal rights a client forgoes in signing such an agreement, and giving the client a chance to consult with independent counsel before signing the agreement. Adams Construction alleged that nobody from Barr Law Group explained the legal implications of the arbitration agreement to Mr. or Ms. Adams before or after they signed it, or advised them to get independent legal advice before signing the fee agreement.2 Nor did Barr Law Group explain to Adams Construction that the Vermont Bar Association provides a free arbitration service for resolution of attorney-client fee disputes. For these reasons, Adams Construction contended that the arbitration agreement was invalid and sought dismissal of the arbitration proceeding.
¶ 5. With respect to the delay in raising the issue, Adams Construction, which had no counsel of record through the arbitration proceeding, indicated that it only learned of this legal basis for objecting to the arbitration shortly before it made the objection.
Construction to pay half of Barr Law Group’s legal fees on the ground that Adams Construction pursued its counterclaims in bad faith.
¶ 7. In February 2017, Adams Construction filed a timely application in the superior court to vacate the arbitration award, reiterating its argument that the pre-dispute arbitration clause that gave rise to the arbitration proceeding was invalid and unenforceable because Barr Law Group violated its fiduciary and ethical duties in securing the agreement, and fraudulently induced Adams Construction’s agreement. In its opposition to the application, the Barr Law Group reviewed the course of the arbitration proceedings, attached copies of arbitration pleadings, and argued that by actively participating in the arbitration proceedings for many months, and pursuing its counterclaims, Adams Construction waived any objection to the arbitration proceedings. The trial court agreed, concluding that Adams Construction’s active participation in the arbitration proceeding for months before their last-minute objection, and then continuing through four days of hearings, constituted a waiver of Adams Construction’s challenges to the validity of the arbitration agreement.
vague, and difficult to apply. We review the legal question of whether a court may conclude that a party has waived an objection to the enforceability of an arbitration agreement if the party makes the objection before the arbitration hearing without deference to the trial court. Garbitelli v. Town of Brookfield, 2011 VT 122, ¶ 5, 191 Vt. 76, 38 A.3d 1133.
awards provides in relevant part: “Upon application of a party to confirm, modify or vacate an award, the court shall vacate an award where . . . a court has found that there was no arbitration agreement and the party did not participate in the arbitration hearing without raising the objection.” 12 V.S.A. § 5677(a)(5). This language suggests that a party may object to the existence (or validity) of an arbitration agreement at any time throughout the arbitration proceeding until the arbitration hearing itself. Compare id. § 5674(b) (referring to “arbitration proceeding”), with id. § 5677(a)(5) (referring to party’s participation in arbitration hearing).
¶ 11. Barr Law Group, on the other hand, draws inspiration from this Court’s discussion in Joder Building Corp. v. Lewis, 153 Vt. 115, 569 A.2d 471 (1989). In Joder Building Corp., a contractor and homeowner submitted their construction contract dispute to arbitration. The parties encountered some problems identifying available arbitrators, and their claims continued to evolve as the arbitration hearing approached. Because the homeowner claimed he had found additional substandard work and would not be able to determine the costs to correct the work for several months, the homeowner sought a postponement of the scheduled arbitration hearing. The arbitration panel refused and held the hearing without the homeowner’s participation. When the contractor moved in the superior court to confirm the award, the homeowner resisted and claimed for the first time that they never signed the statutorily required acknowledgment in the arbitration agreement. On appeal, this Court concluded that the arbitration agreement did, in fact, fall short of the statutory requirements. Id. at 119, 569 A.2d at 473.
number of considerations lead to this conclusion. It is important that any objections to arbitration jurisdiction be raised at the earliest possible moment to allow that issue to be addressed and resolved before the parties expend significant time and resources trying the case. The Uniform Arbitration Act offers a party who challenges arbitration jurisdiction broad pre-arbitration judicial remedies. Therefore, the waiver rule can and should require a party to contest the presence of a valid arbitration agreement early in the proceedings.
Id. at 121, 569 A.2d at 474 (citations omitted). Joder Building Corp. is not determinative of this case because the homeowner in Joder Building Corp. did not challenge the enforceability of the arbitration agreement until after the arbitration order was issued. But the broad language of the opinion suggests a reluctance to allow a party to raise threshold objections to the validity of the arbitration proceeding itself only after substantial participation in that proceeding.
¶ 13. We find some support for this broader view in decisions from other jurisdictions, but there appears to be no clear consensus on the question of whether a party can waive the ability to challenge the validity of an arbitration agreement by conduct prior to the arbitration hearing and, if so, when a party’s participation crosses the line.
[A]bsent a reservation of rights, “partial participation” in the arbitration process can serve to estop a party from challenging the arbitration agreement. Even though an arbitration process has not proceeded to a hearing on the merits, substantial time, money and effort in preparation may well have been invested in the undertaking. Absent a reservation of objection to the arbitration process, when one party participates in preliminary arbitration procedures preparatory to the hearing on the merits, that party is signaling to the other side that full participation in the process is intended.
Id. at 548. Considering the steps Pilgrim took in reliance on Reed’s apparent acceptance of the arbitration agreement, and the course of the parties’ dealings, the court concluded that Reed was estopped from objecting to the arbitration agreement. Id.
no later than the filing of the answer.” (quotations and citations omitted)); Allstate Ins. Co. v. Khait, 643 N.Y.S.2d 163 (App. Div. 1996) (holding that “[b]y actively participating in the selection of the arbitrators and in adjourning the arbitration hearing without any reservation of rights” party “participated in arbitration proceeding” and thereby waived statutory right to stay of arbitration). But see Borg, Inc. v. Morris Middle Sch. Dist. No. 54, 278 N.E.2d 818, 820-21 (Ill. App. Ct. 1972) (holding that school district not estopped from raising question of agreement to arbitrate where school district filed answer to arbitration demand and counterclaim and participated in selection of arbitrators before raising objection); Dachtera v. Whitehouse, 609 N.W.2d 248, 250 (Minn. 2000) (rejecting argument that parties waived right to object to arbitration by not filing declaratory judgment until arbitration had progressed through payment of filing fees and selection of arbitrator, where parties filed action before arbitration hearing).
reason, we decline to reach the merits of Adams Construction’s challenge to the validity of the arbitration agreement, and affirm the trial court’s denial of Adams Construction’s application to vacate the arbitration order.
1. Some of the procedural history was presented to the trial court by way of assertion, rather than affidavit or record evidence. However, neither party has substantially challenged the history set forth above. We note the factual assertions that are disputed.
2. Barr Law Group disputes Adams Construction’s allegations concerning the circumstances surrounding execution of the fee agreement. These disputes are not germane to our resolution of this appeal, which does not turn on the merits of the claim that the arbitration agreement is unenforceable.
3. We note that our decision does not rely on Adams Construction’s participation in the arbitration hearing after filing the objection. Courts have generally held that where a timely objection is made as to whether a claim is subject to arbitration, the issue is preserved even if the objecting party participates in the arbitration proceeding. See, e.g.,Opals on Ice Lingerie v. Body Lines Inc., 320 F.3d 362, 368 (2d Cir. 2003) (recognizing that “if a party participates in arbitration proceedings without making a timely objection to the submission of the dispute to arbitration, that party may be found to have waived its right to object to the arbitration,” but concluding that party in this case had not waived by participating because it objected repeatedly and timely to the arbitration); Ahluwalia v. QFA Royalties, LLC, 226 P.3d 1093, 1098 (Colo. App. 2009) (“If . . . the party clearly and explicitly reserves the right to object to arbitrability, participation in the arbitration does not preclude the party from subsequently challenging the arbitrator’s authority in court.”); Duemer v. Edward T. Joyce and Assocs., P.C., 2013 IL App (1st) 120687, ¶ 50 (“Where a timely objection is made, the issue may be judicially reviewed even if the objecting party participates in the arbitration proceeding.”); see also E.L. Grossman, Annotation, Participation in Arbitration Proceedings as Waiver of Objections to Arbitrability in State Law, 56 A.L.R. 5th 757 § 4 (1998) (collecting cases holding that participation in arbitration proceedings following timely objection to arbitrability does not give rise to waiver of objection).