Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of San Diego County No. 37-2009-00088242- CU-BC-CTL, Jay M. Bloom, Judge.
HUFFMAN, J.
In April 2009, plaintiff Heartland Meat Co., Inc. (Heartland) brought a complaint against defendants and respondents, its former employees, James Methey and Julio Rodriguez and their current employer, Tommy's Quality Meats (Tommy's; sometimes together Defendants), seeking damages for breach of contract, misappropriation of trade secrets, and related claims. The individual Defendants responded with a cross-complaint filed in May 2009, against both Heartland and its principal shareholder, Joseph Stidman (sometimes together Petitioners) for damages for maintaining a hostile work environment. (Gov. Code, § 12940.)
These Petitioners are now the appellants from the trial court's order that denied their petition to compel arbitration, which was based on a clause found in the Heartland employment manual attached to the complaint (the arbitration provision). (Code Civ. Proc., § 1281.2.) That petition to compel arbitration was brought in March 2010, about nine months after the trial court's denial, in June 2009, of Heartland's motion for a preliminary injunction against disclosure of trade secrets. The petition was also brought after case management hearings took place in November of 2009, resulting in discovery planning and trial management orders.
All further statutory references are to the Code of Civil Procedure unless otherwise noted.
In opposition to the petition, Defendants asserted that Petitioners had waived any right to arbitrate, through conduct inconsistent with asserting such a right. (St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1195 (St. Agnes).) The trial court ruled that Petitioners had taken numerous steps that were inconsistent with demonstrating an intent to arbitrate, and denied the petition.
On appeal of the order, Petitioners argue no waiver of any right to pursue arbitration occurred, because the "litigation machinery" had not been adequately invoked (St. Agnes, supra, 31 Cal.4th at p. 1196), and therefore this order must have been based upon the trial court's invalid "general dislike of arbitration, [or] the mere passage of time." Although only Defendant Methey had signed the employment manual, Petitioners continue to argue that nonsignatory Defendants Tommy's and Rodriguez should be also be bound to arbitrate, "by virtue of the inextricably intertwined issues in this employment setting."
For the reasons to be explained, we reject Petitioners' arguments and affirm the order denying the petition. Substantial evidence supports the trial court's findings that Petitioners waived arbitration through their failure to assert the right to pursue it in a timely manner, and that Defendants sufficiently showed prejudice, through their participation in litigation related activities on the merits of the claims, to justify denial of the petition.
FACTUAL AND PROCEDURAL BACKGROUND
A. Complaint; Cross-complaint; Preliminary Injunction Hearing
Individual defendants Methey and Rodriguez worked for Heartland as salesmen, for over 20 and over 11 years, respectively. In 2008, Heartland presented them with an employment manual and required them to sign it, including its arbitration provision, or else their wages would be withheld. Methey agreed under protest, while Rodriguez refused and threatened to take the matter to the state labor board. In March 2009, the individual defendants left Heartland's employ and went to work for defendant Tommy's.
In April 2009, Heartland sued Defendants for damages for breach of contract, misappropriation of trade secrets, and related theories, alleging that they had conspired to take away its customer lists and methods of meat cutting. Attached to the complaint was the employment manual containing the arbitration provision. The prayer for relief does not include any reference to arbitration.
Individual Defendants Methey and Rodriguez promptly filed their cross-complaint in May 2009, asserting a hostile work environment amounted to employment discrimination. Heartland and cross-defendant Stidman answered the cross-complaint on July 29, 2009, without invoking the arbitration provision.
Heartland brought its motion for preliminary injunction in June 2009, but without making any application for an arbitration related stay of all other proceedings, pending arbitration. (§ 1281.8, subd. (d).) The motion was denied, because the trial court found Heartland had failed to adequately identify any trade secret that was misappropriated, nor had Heartland made a sufficient showing of any efforts to maintain the secrecy of its methods of cutting meat, equipment, or customer lists.
B. Case Management; Petition to Compel Arbitration
The court scheduled a case management conference (CMC) to be held in November 2009. The parties prepared case management statements for it (CMS). According to Heartland's CMS, it would complete discovery, including interrogatories, production and admission requests, and depositions, by mid-February "2009" (apparently meaning 2010).
In Defendants' CMS, they represented that by the end of March, they would complete interrogatories, requests for production of documents, and depositions, and would also make expert witness disclosures and conduct depositions. The court set a trial date for May 14, 2010.
Next, 11 months after the complaint was filed, Petitioners obtained new counsel and filed their arbitration petition. Petitioners noticed an ex parte hearing on March 23, 2010, seeking an order shortening time for hearing on the petition. The parties appeared and the court set a briefing schedule, allowing opposition to the petition to be filed in an accelerated manner.
Petitioners asserted that the arbitration provision in the employee manual controlled, the action involved interstate commerce, and all the disputes arose out of the employment relationship, or were inseparably intertwined and interdependent as to Tommy's role. Petitioners requested that the current action be stayed pending arbitration.
In their opposition, filed according to the court's briefing schedule, Defendants argued that Petitioners had waived any right to arbitrate the controversy, through conduct inconsistent with any intent to arbitrate, including almost a year's delay that allowed the ongoing discovery and motion practice to take place. Tommy's attorney provided a declaration attesting to the trial preparation and discovery activities that had taken place before and after the CMC. Defendants also contended that for several reasons, there was no binding or actual agreement to arbitrate, because two of the defendants had not signed the employment manual containing the arbitration provision, and Methey had signed it only in response to undue pressure. (See Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114 [outlining unconscionability standards.])
In reply, Petitioners filed evidentiary objections to alleged legal conclusions in the attorney declaration filed by Tommy's attorney. Petitioners admitted that various discovery items had been served, but contended that discovery had not been completed. Petitioners sought judicial notice of an order compelling arbitration filed in a different case. (Gentile v. Heartland Meat Company, Inc. (Super. Ct. San Diego County, 2010, No. 37-2010-00084319-CU-DE-CTL).) That case was brought by Heartland's former president, John Gentile, who had sued Heartland for wrongful termination. Heartland had successfully petitioned to have that matter sent to arbitration.
C. Ruling
In the ruling issued after oral argument, the trial court first granted Petitioners' requests for a statement of decision and for judicial notice of the order in the other case against Heartland (by Gentile). (§§ 1291, 1294, 632.) No rulings on the evidentiary objections were issued. The court denied the petition on the following grounds. First, "the court finds that defendants/cross-complainants have not waived any objections to the Petition to Compel Arbitration. The parties appeared ex parte on March 23, 2010 for an order shortening time for the Petition to Compel Arbitration and the court set a briefing schedule. Oppositions to the Petition were timely served by the court's deadline."
The trial court rejected the argument by Petitioners that based on business and interstate commerce considerations, the FAA should preempt state arbitration statutes. Instead, "Plaintiff has shown only a trivial impact on interstate commerce."
The key portion of the ruling analyzed the record to determine whether Petitioners had waived any resort to arbitration. The court relied on the test set forth in St. Agnes, supra, 31 Cal.4th 1187, 1195-1196, and stated: "Regardless of whether the FAA or CAA applies, the court finds that [Petitioners have] waived the right to compel arbitration. Both state and federal law emphasize that no single test delineates the nature of the conduct that will constitute a waiver of arbitration.... [¶] Here, [Petitioners'] actions have been inconsistent with the right to arbitration and delayed for a long period before seeking a stay."
In particular, the court relied on the portions of the record showing that the complaint was filed in April 2009, and in May 2009, Heartland was unsuccessfully pursuing a preliminary injunction on trade secret theories. Heartland did not seek any order to stay all other proceedings in the action, pending arbitration. (§ 1281.8, subd. (d).) In June 2009, the application for an injunction had been denied for lack of an adequate identification of any trade secrets, and because Heartland had made only an insufficient showing of "any efforts to maintain the secrecy of the method of cutting meat or customer lists."
Under section 1281.8, subdivision (b), a party to an arbitration agreement may seek a provisional remedy in court connection with an arbitrable controversy, "but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without provisional relief.... " Also, subdivision (d) of this section expressly provides, in relevant part, that "[a]n application for a provisional remedy under subdivision (b) shall not operate to waive any right of arbitration which the applicant may have pursuant to a written agreement to arbitrate, if, at the same time as the application for a provisional remedy is presented, the applicant also presents to the court an application that all other proceedings in the action be stayed pending the arbitration of any issue, question, or dispute which is claimed to be arbitrable under the agreement and which is relevant to the action pursuant to which the provisional remedy is sought."
It was not until after the CMC was held in November of 2009 that Petitioners retained new counsel and filed the petition to compel arbitration, in March 2010. This was two months before the scheduled trial date. "Under these facts, the court finds that the right to arbitrate has been waived by [Petitioners]." Next, the court said: "Because the court has decided that [Petitioners have] waived arbitration, it does not need to reach the issue of whether Tommy's was a party to an arbitration agreement or whether the arbitration agreement was unconscionable."
Following this April 16 ruling, the court continued the trial readiness conference until April 30, 2010, so that mediation could be pursued (but unsuccessfully). The trial date was vacated after Petitioners appealed the order denying the petition to compel arbitration. Although Petitioners have filed a form showing a stay pending appeal exists, the record does not show any express stay order.
At Petitioners' request, which was not opposed, we have granted judicial notice of material that was brought before the trial court, including the American Arbitration Association rules for employment disputes and commercial disputes, as well as the notice of related case and ruling in the separate action involving Petitioners' former employee, Gentile. (Evid. Code, §§ 452, subd. (d); 459.)
DISCUSSION
I
INTRODUCTION
The petition for an order compelling arbitration under section 1281.2 alleged the existence of the arbitration provision and the refusal of all Defendants, who were allegedly bound by the provision, to participate in arbitration. For purposes of analyzing the respective claims about waiver of arbitration, we may defer any consideration of the scope of the arbitration provision or its application to nonparties (Tommy's and Rodriguez, who claim there was no actual agreement to arbitrate, or Methey, who argues he agreed only under undue pressure). On appeal of the waiver ruling, we will assume the existence of an arbitration provision.
In relevant part, section 1281.2 provides that a party to an existing arbitration agreement may seek an order compelling arbitration of the controversy "unless it determines that: [¶] (a) The right to compel arbitration has been waived by the petitioner; or [¶] (b) Grounds exist for the revocation of the agreement."
However, in evaluating the strength of Petitioners' showing of entitlement to enforce the arbitration clause, we cannot ignore the arguments on the merits in opposition to arbitration, which refer to the relatively recent creation and imposition of the provision (in 2008, when the individual Defendants had already worked for Heartland for a decade or two, but were then presented with the manual containing the provision). Those factors have some bearing in explaining why Petitioners did not earlier assert the arbitration provision, within the life of this lawsuit, and they seem to undermine the legitimacy of the petition to enforce arbitration.
In addition, we reject Petitioners' argument that when Defendants did not file a formal response to the petition under section 1290 et seq., instead filing opposition papers, they somehow admitted to the allegations of the petition. In this procedural context, in which there was already a pending lawsuit and jurisdiction asserted over the parties, the trial court had an adequate basis in its ex parte order of March 23, 2010 to set a separate briefing schedule on the petition and response, "for good cause" shown, under section 1290.6. In any case, Petitioners have not supplied any copy of the ex parte order to show why it did not appropriately control the proceedings in this case. We agree with the trial court that none of the substantive objections to arbitration raised by Defendants were waived through the filing procedure followed in this respect.
In relevant part, section 1290.6 establishes the time for filing a response to the petition, which is subject to being extended for good cause shown. Petitioners have not shown why the trial court had no authority to control the proceedings before it or to set a briefing schedule for this proceeding, which was being conducted within the framework of the existing action.
Petitioners likewise have no basis to object that on appeal, Defendants effectively waived any objections by failing to provide, in their respondents' brief, sufficient record cites about the nature and extent of discovery that was being conducted after the CMC, before the petition for arbitration was filed. The parties' respective CMS filings in the record disclose that discovery was being propounded, after the injunction proceedings were resolved but before arbitration was sought. Such discovery efforts are a proper consideration in the waiver inquiry, whether or not they had been completed by the time of the hearing on the arbitration petition. On appeal, we do not find any waiver of Defendants' arguments on appeal, in support of the order, as Petitioners would have us do.
In those respects, Petitioners' briefs have not provided a fair picture of the proceedings that were conducted below, which, after all, were initiated by Petitioners, to invoke the "litigation machinery." (St. Agnes, supra, 31 Cal.4th at p. 1196.) Petitioners cannot reasonably downplay the fact that the court set, at an ex parte hearing that was noticed by Petitioners, a briefing schedule for the petition and response. They are not justified in minimizing the extent to which Defendants undertook the obligation to respond to Petitioners' litigation efforts, through preparing for and propounding discovery. With those considerations stated, we turn to the record to determine whether it supports the dispositive finding of waiver of arbitration rights.
II
WAIVER
A. Standards of Review
Public policy considerations strongly favor arbitration as a means of settling disputes. (St. Agnes, supra, 31 Cal.4th 1187, 1195.) However, a trial court may deny a petition to compel arbitration if it finds the moving party has waived that right. (Ibid.; Berman v. Health Net (2000) 80 Cal.App.4th 1359, 1363 (Berman).) " '[T]he question of waiver is one of fact, and an appellate court's function is to review a trial court's findings regarding waiver to determine whether these are supported by substantial evidence.' [Citation.]" (Ibid.) The party seeking to establish waiver of arbitration must meet a heavy burden of proof. (St. Agnes, supra, at p. 1195.) However, it is well accepted that "[i]f more than one reasonable inference may be drawn from undisputed facts, the substantial evidence rule requires indulging the inferences favorable to the trial court's judgment. [Citation.]" (Davis v. Continental Airlines, Inc. (1997) 59 Cal.App.4th 205, 211 (Davis); Simms v. NPCK Enterprises, Inc. (2003) 109 Cal.App.4th 233, 238-240 (Simms).)
Petitioners seek to have this court conduct de novo review of the ruling, on the ground that only questions of law are presented about waiver. Petitioners claim that all the relevant facts are undisputed, such that only inferences in favor of compelling arbitration could be drawn. (St. Agnes, supra, 31 Cal.4th at p. 1196.)
Both the trial court and this court granted Petitioners' request for judicial notice on appeal of a minute order granting Heartland's petition to arbitrate that was rendered in the other employment case against Heartland brought by former employee Gentile on wrongful termination type theories. In response, Heartland (there a defendant) obtained an order compelling arbitration under that employment agreement. That ruling has no bearing upon the distinct factual and procedural context of the current case. Granting judicial notice of the rendering of that ruling did not include any findings about its persuasiveness in this case, and it has none.
Based on the same authority, Defendants instead contend that we should inquire whether sufficient undisputed evidence supports the trial court's finding that Petitioners' conduct served to waive their right to invoke arbitration, such that the ruling should be upheld on appeal. We agree with the latter approach, because waiver is generally treated as a question of fact, and the record should be analyzed for supporting evidence. We accordingly turn to the record.
B. Applicable Criteria
As laid out in St. Agnes, when a court considers the issue of waiver in this context, the following factors apply: (1) whether the party's actions are inconsistent with the right to arbitrate; (2) whether the litigation machinery has been substantially invoked and the parties were well into preparation of a lawsuit before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) whether intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place; and (6) whether the delay affected, misled, or prejudiced the opposing party. (St. Agnes, supra, 31 Cal.4th at p. 1196, citing Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, 992 (Sobremonte).)
It is not necessarily inconsistent for a party to seek injunctive relief pending arbitration: "[U]nder both California law and the FAA, the trial court has authority to grant injunctive relief pending contractual arbitration, but only if it is necessary to preserve the effectiveness of arbitration." (Davenport v. Blue Cross of California (1997) 52 Cal.App.4th 435, 453.)
Where extensive discovery has taken place in the judicial forum, it may contribute to a significant delay in asserting the right to arbitration, and destroy "whatever efficiencies that would otherwise have been available to [a party] through arbitration. Simply put, ' "[t]he courtroom may not be used as a convenient vestibule to the arbitration hall so as to allow a party to create his own unique structure combining litigation and arbitration." ' [Citations.]" (Guess?, Inc. v. Superior Court (2000) 79 Cal.App.4th 553, 558, citing Christensen v. Dewor Developments (1983) 33 Cal.3d 778, 784.)
To make a showing of prejudice resulting from delay in seeking arbitration, the opposing party should show how the delay undermined the public policies in favor of arbitration, which include making available a speedy and relatively inexpensive forum for dispute resolution. (St. Agnes, supra, 31 Cal.4th at pp. 1203-1204; Davis, supra, 59 Cal.App.4th 205, 211-215.) Where the parties have litigated the merits or the substance of the claims later sought to be arbitrated, or conducted significant judicial discovery about them, prejudice may be attributable to such delay before arbitration is sought. (St. Agnes, supra, at pp. 1203-1204.)
C. Application of Rules
We examine the record to determine if the trial court's decision is supported by substantial evidence, that Petitioners demonstrated no clear intention to preserve any right to enforce the arbitration provision. First, this is not a case in which the original complaint requested not only damages, but also arbitration. (See Simms, supra, 109 Cal.App.4th 233, 240.) Rather, the complaint sought only damages and injunctive relief, and when the provisional remedy of injunction was pursued immediately after the complaint for damages was filed, no stay of the action was requested for purposes of alternative dispute resolution, such as arbitration. (§ 1281.8, subd. (b).) The discovery that Heartland itself served was not limited to promoting arbitration, since arbitration had not yet been requested.
Once Petitioners' new attorney substituted in, about two months before the May 2010 trial date, Petitioners began to take steps toward invoking arbitration. This sequence of events supports a finding of some prejudice to Defendants, who had reported in their CMS and later, at oral argument in the trial court, that they were preparing for trial. The delay could likely have affected or misled Defendants, who were not expecting this to be an arbitration matter. (Simms, supra, 109 Cal.App.4th 233, 240; Sobremonte, supra, 61 Cal.App.4th 980, 992.)
It is not persuasive for Petitioners now to argue that their "court case in essence went dark, " when the injunction was denied, since it was mainly their case to pursue. By that time, they had already answered the cross-complaint. Even taking into consideration their claim that as of March 2010, neither party was actively trying to complete the discovery that was being propounded (in preparation for trial in May 2010), the record shows Petitioners unreasonably delayed in seeking arbitration. Such conduct, of initiating litigation but not pursuing it consistently or actively, is not inconsistent with a finding that "the litigation machinery has been substantially invoked" and the parties "were well into preparation of a lawsuit" before an intent to arbitrate was disclosed, close to the trial date. (Sobremonte, supra, 61 Cal.App.4th 980, 992.)
All the relevant factors in this record weigh against compelling arbitration, and the trial court could reasonably find prejudice to Defendants from the nature of Petitioners' conduct throughout the 11 months of arbitration-free court proceedings, initiated by Petitioners. Defendants responded at a reasonable level to the litigation, including the filing of opposition on the merits at the preliminary injunction proceedings, and a cross-complaint, and they incurred some degree of prejudice in making those efforts, as the trial court impliedly found. Findings of fact by the trial court may not be disturbed on appeal, unless supported by no substantial evidence. (Berman, supra, 80 Cal.App.4th at p. 1365.) "It is not the function of this court to reweigh the evidence and substitute its judgment for the judgment of the trial court." (Id. at p. 1373.) Substantial evidence exists that Petitioners waived any right to resort to arbitration.
Although Petitioners continue to argue that the FAA should apply in this case (perhaps believing it operates against any waiver finding), that argument has no force because, as stated in St. Agnes, supra, 31 Cal.4th at page 1195, "[b]oth state and federal law emphasize that no single test delineates the nature of the conduct that will constitute a waiver of arbitration." Further, we need not reach any issues regarding the enforceability of the arbitration provision as to Methey or the parties that did not sign it. The order denying the petition was a proper evaluation of the record and a reasonable exercise of discretion.
DISPOSITION
The order denying the petition to compel arbitration is affirmed. Costs are awarded to Respondents.
WE CONCUR: BENKE, Acting P. J., AARON, J.