Opinion
H030262
5-31-2007
EXATRON, INC., Plaintiff and Respondent, v. LOUIS DiFRANCESCO, Defendant and Appellant.
NOT TO BE PUBLISHED
Louis DiFrancesco appeals from an order confirming an arbitration award and entering judgment in favor of Exatron, Inc. He argues that the award should be vacated for two reasons: 1) because the arbitrator exceeded his authority by deciding a disputed issue that was expressly excluded from arbitration by a provision contained in the parties written agreement; and 2) because his rights were prejudiced by the arbitrators refusal to hear evidence material to the controversy. (Code Civ. Proc., § 1286.2, subd. (a)(4) & (5).) We reject these arguments and accordingly affirm the judgment.
BACKGROUND
In March of 1994, Louis DiFrancesco (appellant) and Exatron, Inc. (respondent) entered into a License Agreement, under which appellant granted to respondent the exclusive use of a certain technology called "Particle Interconnect" technology (PI technology), and respondent agreed to pay appellant royalties based on a percentage of respondents gross proceeds from the sale of products containing the licensed technology.
After the parties entered into the License Agreement, litigation developed between appellant and a third party over rights under the agreement, including who was entitled to receive the royalties. Although this litigation was concluded in October of 2002, a former attorney for appellant had delivered a notice of lien to respondent, claiming that any royalties due to appellant were actually owed to him. Because of competing claims to the royalties, respondent filed an interpleader action in Santa Clara County Superior Court in January of 2003. At various times, respondent paid royalties due under the License Agreement to the Superior Court, in trust to appellants counsel, or to respondents attorneys trust account. The pending interpleader litigation was concluded in August of 2004. The court ordered certain amounts from the royalties withheld and paid to appellants former attorney, and appellant was paid the remainder of the royalties.
On September 1, 2004, appellant delivered a notice to respondent purporting to terminate respondents license. Under paragraph 9.2(a)(ii) of the License Agreement, appellant was entitled to unilaterally terminate the license agreement if respondent was more than five days late making royalty payments to appellant on more than three occasions in any 12-month period. The basis for appellants termination of the agreement was his claim that payments due during 2003, when the interpleader litigation was pending, were not paid to him until August of 2004. Respondent disputed that any payments had been "late," so as to justify unilateral termination, because payments had been timely made into trust or to the court.
The License Agreement, in Article 10, provided for resolution of disputes arising from the agreement by means of an internal resolution proceeding, then mediation, and if these methods were unsuccessful, through arbitration with JAMS. The parties were unable to settle their dispute through the first two means. On November 22, 2004, appellant submitted a demand for arbitration to respondent, which stated the nature of the dispute as "termination of License & collection." Retired Judge Joseph Biafore was appointed as the arbitrator. On October 3, 2005, appellant submitted a letter brief to the arbitrator, arguing that he had the right to unilaterally terminate the License Agreement because respondent had been late with royalty payments throughout 2003.
Following discovery, which included an inspection by a Certified Public Account (CPA) of respondents records of sales and transfers of the licensed product, and a summary judgment proceeding that disposed of numerous issues, the arbitration hearing took place on the remaining issues on October 19, 2005. Several witnesses testified, including the CPA who had inspected the records and had submitted a report. In addition, the arbitrator received numerous exhibits. The arbitrator issued an interim award on November 14, 2005, resolving all claims in favor of respondent. After further briefing on attorneys fees, the arbitrator issued his "Final Award" on December 28, 2005.
In the Final Award, the arbitrator identified two issues: 1) whether the License Agreement had been terminated by appellant, and 2) what was the proper scope of the CPAs inspection of respondents records of sales of the licensed products. As to whether appellant could properly terminate the License Agreement on the basis that payments withheld during the interpleader action were late, the arbitrator rejected appellants claim. The arbitrator found that appellant failed to raise this claim during the interpleader action, and was therefore barred from raising it at a later time. Further, the arbitrator specifically found that respondent was not "late" with royalty payments, within the meaning of paragraph 9.2(a)(ii) of the License Agreement, because respondent had routinely paid the royalties into its attorneys trust account until the interpleader action was finally concluded.
In regard to the inspection issue, the arbitrator found that the inspection was conducted in accordance with previous orders and in accordance with paragraph 3.5 of the License Agreement, which provided that respondent was to maintain records of "all sales or other transfers of Licensed Products" and that these records should be made available for inspection by a CPA "for the purpose of verifying royalty statements and payments made" by respondent under the agreement. The arbitrator noted that the CPA inspecting the records found a discrepancy of $ 300 on one invoice, and that respondent had paid this amount to appellant at the end of the hearing.
In conclusion, the arbitrator ordered that the License Agreement was to remain in full force and effect. In accordance with the agreement, respondent was entitled to attorneys fees and costs. The arbitrator awarded respondent $55,904 in attorneys fees and $8,346 in costs. The arbitrators Final Award was served on the parties on January 17, 2006.
On February 6, 2006, respondent filed a motion to confirm the arbitration award. Appellant opposed the motion. Appellant argued that the arbitrator "exceeded [his] powers" (§ 1286.2, subd. (a)(4)), by adjudicating his right to terminate the License Agreement because the dispute resolution provision contained in paragraph 10.1 of the agreement expressly excluded disputes relating to unilateral termination of the Agreement under paragraph 9.2. He argued further that his rights were "substantially prejudiced" because of the arbitrators "refusal . . . to hear evidence material to the controversy" relating to the inspection of records. (§ 1286.2, subd. (a)(5).)
The court received written argument from both sides and held a hearing on the petition on March 21, 2006. On March 23, 2006, the court issued an order granting the petition. A formal order confirming the award and entering judgment was filed April 12, 2006. Appellant filed this appeal on June 7, 2006.
ISSUES
Appellant argues that the court erred in deciding against him on the two issues he raised in his opposition to the motion to confirm the arbitration award: that the arbitrator exceeded his powers by adjudicating the parties dispute over termination of the License Agreement; and that the arbitrator improperly refused to hear evidence material to the controversy, relating to the inspection of records. (§ 1286.2, subd. (a)(4) & (5).)
Standard of Review
"It is well settled that the scope of judicial review of arbitration awards is extremely narrow." (California Faculty Assn. v. Superior Court (1998) 63 Cal.App.4th 935, 943; Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1 (Moncharsh).) "Limited judicial review is a well-understood feature of private arbitration, inherent in the nature of the arbitral forum as an informal, expeditious, and efficient alternative means of dispute resolution." (Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 831.) Because of the legislatures recognition of a strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution, courts are to " ` "indulge every intendment to give effect to such proceedings." " (Moncharsh, supra, 3 Cal.4th at p. 9.) Courts may not review either the merits of the controversy or the sufficiency of the evidence supporting the award. (California Faculty Assn. v. Superior Court, supra, 63 Cal.App.4th at p. 943.) With narrow exceptions, "an arbitrators decision is not generally reviewable for errors of fact or law, whether or not such error appears on the face of the award and causes substantial injustice to the parties." (Moncharsh, supra, 3 Cal.4th at p. 6.)
The same rules apply to limit appellate review of a judgment confirming an arbitration award. Appellate courts cannot review the merits of the dispute, the sufficiency of the evidence, or the reasoning in support of the arbitrators decision. (Pierotti v. Torian (2000) 81 Cal.App.4th 17, 23.) As a general rule, "[t]he decision to confirm or vacate an arbitration award lies with the trial court." (Betz v. Pankow (1993) 16 Cal.App.4th 919, 923; §§ 1285-1287.6.) "[W]e must accept the trial courts findings of fact if substantial evidence supports them, and we must draw every reasonable inference to support the award." (Alexander v. Blue Cross of California (2001) 88 Cal.App.4th 1082, 1087.) "On issues concerning whether the arbitrator exceeded his powers, we review the trial courts decision de novo, but we must give substantial deference to the arbitrators own assessment of his contractual authority." (Ibid.; Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 373, 376 fn. 9; California Faculty Assn. v. Superior Court, supra, 63 Cal.App.4th at pp. 944-945.)
A judgment upon an arbitration award reached pursuant to a contractual agreement to arbitrate is not subject to reversal except on the grounds set forth in section 1286.2, subdivisions (a)(1) through (6). Absent clear proof of one of these grounds, an appellate court may not intervene. (Moncharsh, supra, 3 Cal.4th at p. 33; California Faculty Assn. v. Superior Court, supra, 63 Cal.App.4th at p. 944.) The subdivisions that appellant claims apply here are subdivisions (a)(4) and (a)(5).
Section 1286.2, subdivision (a)(4)
An arbitration award may be vacated if the arbitrators have "exceeded their powers." (§ 1286.2, subd. (a)(4).) It is well established that an arbitrator does not exceed his or her powers merely by assigning an erroneous reason for the decision. (Moncharsh, supra, 3 Cal.4th at p. 28.) Instead, "powers" refers to the authority "of the arbitrator to resolve the entire `merits of the `controversy submitted by the parties." (Ibid.) An arbitrator acts within his or her powers by deciding all the contested issues submitted for decision and determined by reference to the underlying contract. (Ibid.)
Appellant argues that the arbitrator exceeded his powers, within the meaning of subdivision (a)(4) of section 1286.2, by resolving the issue whether he was entitled to unilaterally terminate the License Agreement. However, the record shows that the question whether appellant could unilaterally terminate the agreement was one of the principal issues submitted to the arbitrator for decision. Appellant identified this issue as issue No. 1 in his list of issues submitted to the arbitrator. In his brief submitted to the arbitrator, appellant argued that he was entitled to terminate the License Agreement under paragraph 9.2(a)(ii), which provided for a unilateral right to terminate if respondent was more than five days late in making royalty payments over a 12-month period. The arbitrator considered and rejected this argument, finding that respondent was not "late" within the meaning of paragraph 9.2(a)(ii), since respondent timely paid the fees into a trust account until the interpleader action was final.
After the arbitrator decided this issue against him, appellant opposed the motion to confirm the award by arguing, as he does here, that the arbitrator exceeded his powers by deciding the issue. It has long been established that "[a] claimant may not voluntarily submit his claim to arbitration, await the outcome, and if the decision is unfavorable, challenge the authority of the Arbitrator to act." (University of San Francisco Faculty Assn. v. University of San Francisco (1983) 142 Cal.App.3d 942, 952-954; OMalley v. Petroleum Maintenance Co. (1957) 48 Cal.2d 107, 110-111.) Appellant himself submitted this issue to the arbitrator to be decided on the merits. At no time during the arbitration did he contend that the arbitrator did not have the authority to decide it. As we have noted, an arbitrator acts within his or her powers by deciding "all the contested issues of law and fact" submitted for decision by the parties. (Moncharsh, supra, 3 Cal.4th at p. 28.) And as our Supreme Court observed in Moore v. First Bank of San Luis Obispo (2000) 22 Cal.4th 782, "[h]aving submitted the [] issue to arbitration, plaintiffs cannot maintain the arbitrators exceeded their powers . . . by deciding it, even if they decided it incorrectly." (Id. at p. 787.)
Furthermore, the scope of the arbitrators contractual authority is a matter that is addressed to the arbitrators discretion, "unless expressly restricted by the agreement." (Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at p. 376.) Appellant contends that the License Agreement in paragraph 10.1(a) expressly excludes the issue of unilateral termination of the agreement from arbitration. We do not believe that the cited paragraph in the License Agreement clearly forecloses consideration by the arbitrator of the parties dispute about termination. Paragraph 10.1(a) appears in Article 10, entitled "Dispute Resolution Procedure." It first provides that the parties agree to submit "any dispute, breach or claim of breach, non-performance, default, or repudiation arising from, related to, or in connection with, this Agreement or any of the terms or conditions hereof, or any transaction hereunder or any other claim between the parties whether in contract, tort, or otherwise (collectively, a `Dispute) to [specified mediation and arbitration procedures]." The part of paragraph 10.1(a) relied on by appellant then provides: "Notwithstanding the foregoing, nothing in this Paragraph 10.1 is intended to prevent termination of this Agreement under Paragraph 9.2, notwithstanding any termination of this Agreement under Paragraph 9.2, if any continuing Dispute persists such Dispute shall be subject to the provisions of this Article 10. "
Appellant argues that the italicized provision must be taken to mean that a party can unilaterally terminate the agreement under paragraph 9.2, and that any dispute arising therefrom is not subject to the dispute resolution procedure of Article 10. Although the language of this provision is not a model of clarity, we do not believe it can mean what appellant contends. The parties clearly agreed that all disputes arising from the agreement, specifically including "default" or "non-performance," would be decided subject to specified dispute resolution procedures. The first part of the italicized provision appears to provide that either party can unilaterally terminate, without arbitration, for reasons set forth in paragraph 9.2. However, the second clause of this sentence limits the first by providing that if any dispute persists, the dispute shall be subject to the agreements dispute resolution procedures, including mediation and arbitration.
"The scope of arbitration is, of course, a matter of agreement between the parties, . . ." (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 323.) In interpreting the parties agreement, we apply the usual principles governing formation of contracts. "Arbitration agreements are to be construed like other contracts to give effect to the intention of the parties." (Crowell v. Downey Community Hospital Foundation (2002) 95 Cal.App.4th 730, 734.) "The whole of a contract is to be taken together, . . . each clause helping to interpret the other." (Civ. Code, § 1641.) "[A]ny 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.)
Applying these rules here, we find that the parties agreement does not clearly exclude a continuing dispute regarding termination, such as occurred here. The arbitration clause before us is extremely broad, applying to "any dispute, breach or claim of breach, non-performance, default, or repudiation" arising from the agreement. While it purports to except from arbitration unilateral terminations accomplished pursuant to paragraph 9.2, that exception is immediately qualified by language providing "if any continuing Dispute persists such Dispute shall be subject to [arbitration]." We therefore agree with the trial court, which found that "the language of Article 10 of the agreement (10.1(a)) makes continuing disputes subject to arbitration; a dispute relating to termination would fall within the purview of this section." This interpretation is both reasonable and gives meaning to all parts of the provision, as well as supporting strong policy favoring arbitration.
Cases relied on by appellant are distinguishable. In re Tobacco Cases I (2004) 124 Cal.App.4th 1095 involved a motion to compel arbitration under a written agreement. The trial court found that the arbitration clause was narrowly drawn and that its language restricted arbitration only to disputes arising out of calculations performed by an auditor. The claims at issue in the Tobacco case did not involve any calculations, because the auditor had not yet performed any calculations. Therefore, the claims did not come within the arbitration clause, and the denial of the motion to compel arbitration was affirmed. The case before us here is not similar. The arbitration clause in the parties agreement here is extremely broad. While a termination may be accomplished without resort to the specified alternate dispute resolution procedures, any "continuing Dispute" such as the one between the parties here, is subject to those procedures. Otherwise, a party could unilaterally terminate the agreement for any reason, without a means for the other party to assert an objection. Furthermore, unlike the Tobacco case, in which the party resisting arbitration opposed a motion to compel arbitration, here appellant submitted his claim to the arbitrator for decision.
Trabuco Highlands Community Assn. v. Head (2002) 96 Cal.App.4th 1183 is also inapposite. That case involved an agreement for nonbinding arbitration. The issue was whether the parties had actually agreed to binding arbitration during the arbitration hearing. The court found that the trial court, in a petition to confirm the arbitration award, improperly relied only on the arbitrators characterization of his award to determine that the parties had agreed upon binding arbitration. The court found that "[i]ndependent judicial review of whether an arbitration is binding is necessary to preserve the integrity of the arbitration process and the judicial system." (Id. at p. 1190.) This case has no application here. There is no question that the parties here had agreed to binding arbitration. The only question is whether the particular dispute submitted to the arbitrator was subject to the dispute resolution procedures set forth in Article 10 of the parties agreement. As we have found, paragraph 10.1(a) did not clearly and expressly exclude continuing disputes involving termination from the agreements dispute resolution procedure.
Section 1286.2, subdivision (a)(5)
This subdivision provides for vacation of the arbitration award if "[t]he rights of the party were substantially prejudiced by the refusal of the arbitrators to . . . hear evidence material to the controversy . . . ."
Appellants claim involves the interpretation of paragraph 3.5 of the License Agreement, entitled "Inspection." It provides that respondent was to "keep full, true and accurate records of all sales or other transfers of Licensed Products. . . . These records shall be available upon written request . . . for inspection at a reasonable time during regular business hours by a Certified Public Accountant . . . for the purpose of verifying royalty statements and payments made by [respondent] under this Agreement. The person conducting the inspection shall be given access to any and all books and records requested, including copies of actual invoices, to verify the accuracy of royalty payments."
In accordance with paragraph 3.5, and pursuant to the arbitrators order of September 8, 2005, the firm of Delucchi, Hawn & Co., LLP, Certified Public Accountants (Delucchi), were retained to inspect respondents records of sales and other transfers of licensed products from December 13, 2000 through December 13, 2004, in order to verify royalty payments made to appellant under the parties agreement. The parties mutually agreed upon the choice of Delucchi. Delucchis written report, dated October 6, 2005, provided that its inspection was not an audit. "Rather, the inspection consisted only of those invoices that were furnished to us and identified by [respondent] as being sales or transfers of PI products."
After receiving a copy of this report, appellant submitted a written objection to the arbitrator, contending that the inspection by Delucchi did not comply with paragraph 3.5 of the agreement because Delucchi was not "given access to any and all books and records requested . . . ." The arbitrator disagreed, finding in his Final Award that "the inspection of the records and verification of the accuracy of the royalty payments has been conducted by Mr. Delucchi in accordance with the provisions of Section 3.5 of the License Agreement and the previous orders of the Arbitrator herein as to the scope of the inspection."
Appellant contends that the arbitrators ruling constituted a ground for vacation of the award under section 1286.2, subdivision (a)(5), in that it constituted a "refusal . . . to hear evidence material to the controversy . . . ." He argues that by allowing review only of those records furnished by respondent, rather than all of respondents records, the arbitrator deprived him of an important part of the agreement between the parties. We reject this argument. The parties in this case submitted their dispute about the payment of royalties to the arbitrator, consistent with their agreement to do so. The arbitrator interpreted paragraph 3.5 of the parties License Agreement, issued an order requesting an inspection of respondents records in accordance with that paragraph, and then determined that the inspection and subsequent report complied with the order and the agreement.
The arbitrator was entitled to interpret the relevant parts of the parties agreement in deciding the issues submitted to him. (See Safeway Stores, Inc. v. Brotherhood of Teamsters (1978) 83 Cal.App.3d 430, 438 ["so far as the arbitrators decision concerns construction of the contract, the courts have no business overruling him because their interpretation of the contract is different from his"].) The process engaged in by the arbitrator does not fall within subdivision (a)(5) or any of the other grounds for vacation of an arbitration award listed in section 1286.2. Rather it constituted a series of substantive decisions by the arbitrator integral to resolving the parties dispute regarding royalties in accordance with their agreement. Such decisions are subject to extremely limited judicial review as "it is the general rule that, with narrow exceptions, an arbitrators decision cannot be reviewed for errors of fact or law." (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 11.) Where an arbitrators award "represents a plausible interpretation of the contract in the context of the parties conduct, judicial inquiry ceases and the award must be affirmed." (Screen Actors Guild v. A. Shane Co. (1990) 225 Cal.App.3d 260, 265.)
Appellant seeks to use section 1286.2, subdivision (a)(5), as "a back door to Moncharsh through which parties may routinely test the validity of legal theories of arbitrators. Instead, we interpret section 1286.2, subdivision [(a)(5)], as a safety valve in private arbitration that permits a court to intercede when an arbitrator has prevented a party from fairly presenting its case." (Hall v. Superior Court (1993) 18 Cal.App.4th 427, 438-439.) Appellant has demonstrated no such prejudice here.
Case law relied on by appellant is inapposite. In Bonshire v. Thomson (1997) 52 Cal.App.4th 803, the arbitrator considered extrinsic evidence in reaching a decision, in direct contravention of an integration clause in the arbitration agreement specifically prohibiting the use of such extrinsic evidence. Nothing of the sort occurred here. The License Agreement provided that respondent make available to appellant "records of all sales or other transfers of Licensed Products." The arbitrator was entitled to interpret this language, to order an inspection of the pertinent records, rather than a full audit, and to determine whether the scope of the inspection adequately complied with the contract. The arbitrator did not violate any express provision of the agreement as in Bonshire.
In sum, appellant has not shown any basis for vacating the arbitration award under section 1286.2, subdivision (a)(5).
Sanctions
Respondent suggests in its brief that appellant is deserving of sanctions under section 907 for filing a frivolous appeal, since the appeal fails to raise any meritorious issues, particularly in light of the extremely limited scope of review of arbitrators awards. A party seeking sanctions must do so in a separate motion to this court. (Cal. Rules of Court, rule 8.276(e).) We therefore do not consider this issue.
DISPOSITION
The judgment confirming the arbitrators Final Award is affirmed.
We concur:
MCADAMS, J.
DUFFY, J. --------------- Notes: All further unspecified statutory references are to the Code of Civil Procedure.