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A March 25, 2008 decision by the United States Supreme Court in Hall Street Associates v. Mattel, No. 06-989, limited the ability of contracts with arbitration clauses to provide for enhanced federal court review of the arbitration results. The Supreme Court held that arbitration decisions subject to the Federal Arbitration Act (9 U.S.C. § 1, et seq.) (“FAA”) can only be vacated, modified or corrected on the limited grounds set out in the statute such as fraud and corruption.
Many commercial contracts provide that disputes will be resolved by an arbitrator rather than by a judge or jury in court. After an arbitrator has decided the case, the parties can then return to court for enforcement of the judgment.
In considering arbitration, contracting parties are sometimes concerned that an incorrect ruling by the arbitrator will not be subject to appeal. To provide for greater appeal rights, the parties may provide that the court enforcing an arbitration award will be allowed to review whether the arbitrator reached the correct result. For example, in the Hall case, the parties agreed to arbitrate their environmental clean-up dispute, but their contract provided that the district court
shall vacate, modify or correct any award: (i) where the arbitrator’s findings of facts are not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of law are erroneous.
The Supreme Court ruled that this provision was not enforceable because the FAA limits the situations in which a court can change an arbitration award. In particular, 9 U.S.C. § 10(a) provides:
(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration–
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
Similarly, 9 U.S.C. § 11 specifies limited grounds for a court to correct or modify arbitration awards.
The Supreme Court held that in providing the limited grounds for review set out in sections 10 and 11 of the FAA, Congress did not intend to allow a contract to expand review.
The decision in Hall does not affect how a state court applying state law would review an arbitration award.
Case: Fashion Valley Mall, LLC v. National Labor Relations Board, Case No. S144753 (Cal. Sup. Ct. 12/24/07)
The One Sentence Summary: Although shopping centers may enforce reasonable time, place, and manner rules to ensure that free speech activities do not interfere with normal business operations, they may not enforce content-based restrictions such as prohibiting speech that urges a boycott of one or more stores in the center.
What They Were Fighting About: Members of a union representing pressroom employees of a San Diego general circulation newspaper distributed leaflets to customers entering and leaving Robinsons-May department store at Fashion Valley Mall in San Diego. The union and the newspaper had been unable to reach a new collective bargaining agreement. The leaflets alleged that the newspaper treated its employees unfairly and stated that the department store advertised in the newspaper. Mall officials required the leafleting to stop because the union members had not obtained a permit to engage in expressive activity at the mall. Under mall rule 5.6.2, a permit applicant must agree to refrain from conduct urging customers not to purchase merchandise or services offered by one or more stores or merchants in the mall. After the union filed charges with the National Labor Relations Board (“NLRB”), an administrative law judge ruled that the union members were engaged in a lawful boycott of the department store and ordered the mall to cease and desist from prohibiting the leafleting. The NLRB affirmed that order, finding that California law permits speech and petitioning activity in private shopping centers subject to reasonable time, place, and manner rules and that rule 5.6.2 was an impermissible content-based restriction. On appeal, the United States Court of Appeals for the District of Columbia Circuit requested that the California Supreme Court decide whether under California law the mall could maintain and enforce rule 5.6.2 against the union.
Court Holdings: The California Supreme Court granted the request for review and held, in a 4-3 decision, that the right to free speech under the California Constitution includes the right to urge customers in a private shopping mall to boycott one or more of the mall’s stores.
- In Robins v. Pruneyard Shopping Center, 23 Cal. 3d 899 (1979), the California Supreme Court held that the California Constitution protects speech and petitioning in shopping centers that are privately owned (even though the First Amendment to the United States Constitution does not), subject to reasonable time, place, and manner rules.
- In the present case, the court rejected the mall’s argument that its rule prohibiting speech that advocates a boycott of a mall store or merchant is a reasonable regulation to prevent interference with normal business operations.
- The court found that the mall’s rule is not content-neutral because it prohibits speech urging a boycott while permitting speech that does not, precluding an entire category of speech. The court concluded that the mall’s rule could not be justified by any legitimate concerns that are unrelated to content. Peaceful leafleting that urges a boycott in a mall does not by its nature create disruptive congestion, nor is it inherently intrusive or coercive like some solicitations for monetary donations that may be prohibited. Leaflets urging a boycott may persuade customers not to patronize a store, but the mall’s concern over the effectiveness of the speech’s message is not a proper basis for prohibiting it.
- Applying strict scrutiny, the court concluded that the mall’s interest in maximizing the profits of its merchants was not compelling compared to the union’s right to free speech.
- The three dissenting justices advocated the overruling of Pruneyard (which has been rejected by most other jurisdictions) on the grounds that private property should not be treated as a free speech zone. Moreover, they opined that even under Pruneyard, free speech activity must not be incompatible with the normal use of the property, and that speech urging a boycott of businesses at a shopping center is incompatible with the center’s purpose of enabling its tenants to do business. “We should not compel shopping center owners to permit activity that interferes with the purpose for the center’s existence.”
The One Sentence Summary: The California Constitution does not protect expressive activity in the area immediately surrounding the entrance of an individual retail store that does not itself possess the characteristics of a public form, even when the store is part of a larger shopping center.
What They Were Fighting About:
Plaintiffs, on behalf of a class of individuals who gather voter signatures for initiatives, referenda and recalls, and register voters, filed suit against defendants Target, Wal-Mart and Home Depot, based on the stores’ refusal to allow plaintiffs to collect signatures in the area outside the stores’ entrances. Plaintiffs alleged causes of action for violation of the right to free speech, violation of Civil Code sections 51 and 52, violation of Business & Professions Code section 17200 and declaratory relief, and sought damages and equitable and injunctive relief. Plaintiffs conceded that their action was directed only at defendants’ stores located in larger shopping centers (not stand-alone stores) and argued that these centers were public fora where expressive activity was allowed. The trial court granted summary judgment to defendants on the ground the defendants’ store entrances, aprons and perimeters were not public fora but were an extension of the store itself, and therefore the societal interest in using the stores for expressive activity did not outweigh the defendants’ interests in controlling the use of their private property. On appeal, plaintiffs argued that the trial court made two errors in granting summary judgment: first, triable issues of fact existed as to whether plaintiffs were gathering signatures on defendants’ private property (as opposed to the shopping center’s property); and second, the trial court erroneously concluded that the area in front of defendants’ stores was not a public forum.
Court Holdings: The Court of Appeal affirmed the judgment on the trial court’s order granting summary judgment and held:
- The undisputed evidence established that the areas where plaintiffs were gathering signatures were private property and that defendants controlled the areas by using them to sell merchandise. The court also rejected plaintiffs’ argument, raised for the first time at the summary judgment hearing, that some of the apron areas actually were owned by the shopping centers and should therefore be considered public fora like a shopping center common area because the argument was inconsistent with plaintiffs’ complaint, which alleged that defendants owned the areas in question.
- The apron and perimeter area of defendants’ stores were not a public forum under the balancing test established by the California Supreme Court in Robins v. Pruneyard Shopping Center (1979) 23 Cal.3d 899, 910, affd. sub nom., Pruneyard Shopping Center v. Robins (1980) 447 U.S. 74 (“Pruneyard“). Pruneyard held that the California Constitution protects expressive activity in the common areas of a large, privately owned shopping center based on a balancing of the competing interests of the private property owner with society’s interest in using the private property as a forum for the expressive activity. Courts applying the balancing test look at whether the private property serves as the functional equivalent of a public forum, considering (1) the nature, purpose and primary use of the property; (2) the extent and nature of the public invitation to use the property; and (3) the relationship between the ideas sought to be presented and the purpose of the property’s occupants. In this case, the nature, purpose and primary use of the property were not designed to encourage patrons to spend time together or be entertained; the extent and nature of the public invitation to use the property was designed to encourage shopping, not congregating; and there was no relationship between the ideas sought to be presented and the purpose of the property’s occupants.
- The court rejected plaintiffs’ argument that the location of some of defendants’ stores as “anchors” in large Pruneyard-type shopping centers bestowed a public nature on the stores’ apron and perimeter areas, and declined to extend the Pruneyard holding to the entrance and exit area of an individual retail establishment in a larger shopping center. The undisputed evidence showed that the apron and perimeter areas of defendants’ stores lacked any public forum attributes and the trial court therefore properly concluded that any societal interest in using the area as a forum for expressive activity did not outweigh defendants’ interest in maintaining control over the use of their stores.
Case: Schultz v. Neovi Data Corp., No. G033879 (Cal. Ct. App. 6/15/07)
The One Sentence Summary: Complaint alleging that credit card processors had knowledge of and provided substantial assistance to web site’s operation of illegal lottery, wherein consumers had to make online purchases for the chance to win expensive home electronics products, stated a cause of action for aiding and abetting unfair competition under California Business and Professions Code section 17200.
What They Were Fighting About:
Plaintiff Schultz alleged that defendant EZ Expo operated a web site “matrix” wherein a consumer could receive expensive home electronics products (such as a 50-inch plasma television) for a fraction of the price, if he paid a $150 fee for three “E-books” and if 50 other consumers also joined the same matrix after him. Defendants PaySystems and Ginix allegedly provided credit card processsing and billing services for EZ and were used by matrix customers to pay for their purchases of E-books.
Plaintiff’s complaint pleaded, on behalf of himself and as a representative in a class action, an unfair competition cause of action against all defendants pursuant to California Business and Professions Code section 17200 et. seq. Plaintiff alleged that the credit card processors aided and abetted EZ’s operation of an illegal lottery or pyramid scheme in violation of California statutes. Trial court sustained demurrers by PaySystems and Ginix (as well as defendants PayPal and Neovi) on the grounds that the complaint failed to state facts sufficient to constitute a cause of action for aiding and abetting unfair competition. Plaintiff appealed.
Court Holdings: Court of appeal reversed the granting of PaySystems’ and Ginix’s demurrers (while affirming as to PayPal and Neovi) and held that plaintiff had adequately pleaded facts to support aiding and abetting unfair competition. Court reasoned that:
- The elements of aiding and abetting an intentional tort by another are (1) knowing that the other’s conduct constitutes a breach of duty, and (2) giving substantial assistance or encouragement to the other to so act. Plaintiff’s complaint contained facts satisfying each.
- Plaintiff alleged that PaySystems and Ginix reviewed EZ’s web site and recognized that it was an illegal lottery, that it generated substantial revenue, and that it could be very profitable for them as credit card processors. Plaintiff also claimed that PaySystems and Ginix knew that the money being paid by consumers for E-books was for purposes of participation in the lottery. These allegations satisfied the knowledge element.
- As for the substantial assistance or enouragement element, plaintiff alleged that PaySystems and Ginix authorized EZ to configure its web site so consumers could click on their logos and be linked directly to their sites for credit card payment processing. Plaintiff further alleged that they did this with the intent of aiding and abetting EZ’s illegal lottery operation and realized that their services would “lend an aura of respectability” to EZ’s operation and encourage consumer participation. These allegations were sufficient to defeat PaySystems’ and Ginix’s demurrers.
- By contrast, plaintiff’s conclusory allegations did not plead sufficient facts to satisfy the elements of knowledge and substantial assistance as to defendants PayPal and Neovi.
- Court of appeal remanded the case as to defendants PaySystems and Ginix and instructed the trial court to give plaintiff the opportunity to amend the complain to plead facts satisfying the standing and class action requirements of section 17200 as amended by Proposition 64 in November 2004 (which added injury-in-fact requirement to section 17200 during pendency of plaintiff’s appeal).
Case: Parlour Enterprises, Inc. v. The Kirin Group, Inc., No. G036525 (Cal. Ct. App. 6/19/07)
The One Sentence Summary: Lost profits awarded by jury for breach of franchise agreement were reversed due to speculative expert testimony based on unreliable proforma financial projections and market data for other restaurants not shown to be sufficiently similar to plaintiffs’ restaurants.
What They Were Fighting About: Defendant Kirin Group bought the trademarks and trade names to Farrell’s Ice Cream Parlours in 1996 and entered into written agreements in 2000 giving plaintiff Parlour Enterprises the exclusive right to develop Farrell’s subfranchises in California. Parlour would receive some up-front fees as well as royalties based on a percentage of net sales. Unable to find enough investors to finance the opening of the minimum number of California restaurants required by the agreements (only one restaurant had been opened), Parlour set up limited partnerships to fund the construction of additional Farrell’s restaurants. Prior to their completion, Kirin terminated the agreements. Parlour (along with the limited partnerships) filed suit alleging causes of action including breach of contract, fraud, negligent misrepresentation, and interference with prospective business advantage. Jury trial resulted in judgment for Parlour and the limited partnerships and a damages award of $6.6 million for lost profits, lost franchise fees, and additional expenses incurred.
- Court of appeal reversed all but $130,000 of the jury’s $6.6 million damages award on the grounds that the evidence on which it was based was speculative expert opinions that should have been excluded by the trial court. Most significant is the part of the court’s written decision regarding lost profits.
- Lost profits for an unestablished business may be recovered if the evidence makes reasonably certain both their occurrence and extent. Expert testimony may provide a sufficient basis for a damages award of lost profits if it is supported by a substantial factual basis rather than mere speculation and hypothetical scenarios.
- Applying these legal principles, the court of appeal concluded that plaintiffs’ expert opinions on lost profits were based on unreliable proforma financial projections from an offering circular prepared by Parlour and given to potential investors. Such projections were mere assumptions, not based on operational results of an actual business substantially similar to the lost opportunity.
- In addition to unreliable projections, plaintiffs’ expert relied on market data for a dozen smaller ice cream parlours and for the “Friendly’s” restaurant chain. However, because both Friendly’s and the smaller ice cream parlours had different business models than Farrell’s, they were not sufficiently similar businesses upon which to base a calculation of plaintiffs’ alleged lost profits.