Opinion
B165648.
11-19-2003
LANCE HOOL et al., Plaintiffs and Respondents, v. VILLAGE ROADSHOW PICTURES (U.S.A.) INC., Defendant and Appellant.
Jeffer, Mangels, Butler & Marmaro, Marc Marmaro, Mark M. Rosenthal, and Amy Lerner Hill for Defendant and Appellant Village Roadshow Pictures (U.S.A.) Inc. Hancock Rothert & Bunshoft, Patrick A. Cathcart, Mikel A. Glavinovich, and Richard L. Seabolt for Plaintiffs and Respondents.
I. INTRODUCTION
Defendant, Village Roadshow Pictures (U.S.A.) Inc., appeals from a judgment and an amended judgment the effect of which was to confirm an arbitration award in favor of plaintiffs, Lance Hool and Charles R. Meeker. Defendants contend: the $ 18,850,000 contract breach award must be vacated because it is not rationally related to any wrongful conduct; the $7,546,875 punitive damage award must be vacated because it violates public policy; and the contract breach award violates public policy. We affirm the judgment.
II. BACKGROUND
A. The March 21, 1996, Memorandum of Understanding
On March 21, 1996, plaintiffs and defendant entered into a memorandum of understanding which was a settlement agreement. The memorandum of understanding resolved a pending lawsuit and is attached to the operative pleading in the present case. The parties understood that a more "formal settlement agreement" was to be drafted later. In terms of the obligation to prepare a more formal agreement, the memorandum of understanding stated: "The parties agree to negotiate and execute a formal agreement encompassing the principal terms . . . . In negotiating such other terms and conditions, the parties may refer to the normal range of industry practice, but with the understanding that this is not a `standard industry practice type of agreement and that primary reference should be given to the evident spirit and intent of the principal terms . . . ." The memorandum of understanding provided plaintiffs were to produce two films for defendant with a minimum budget of $6 million each. The producers fee for the first film was to be $300,000 which would be paid to plaintiffs. Plaintiffs were to be paid a $350,000 fee for the second film. If defendant recouped its out of pocket production costs under specified circumstances for the first two films, a mutually agreed upon third film would be produced. Plaintiffs fee for the third film was to be $ 400,000. In the event the third film was not produced, plaintiffs were to receive 7.5 percent of the "video gross receipts" resulting from the United States and Canadian distribution of a motion picture entitled "Bullet."
Additionally, plaintiffs were to receive five percent of the gross receipts derived by defendant from the United States and Canadian distribution rights from the three films to be produced paid on a specified deferred basis. This was to be paid as an advance on plaintiffs share of the net profits. Defendant was to receive 60 percent of the net profits from the three films. As the producers, plaintiffs were to receive 40 percent of the net profits of the three films. In other words, plaintiffs were to share in both the gross receipts and net profits of the three films. Moreover, upon execution of the March 21, 1996, agreement and dismissal of the lawsuit, plaintiffs were to receive $200,000 which was to be applied against the aforementioned producers fees on a specified basis.
Under the terms of the March 21, 1996, memorandum of understanding, plaintiffs were to use their best efforts to submit at least seven "prospective projects" within six months. The submissions were to include a screenplay, suggested cast and director, and proposed budget. Defendant was under no obligation to approve any of the seven submissions. But if none of the seven submissions were approved, defendant would be required to submit a project to produce to plaintiffs. There were schedules for the financing of the film and the commencement of "principal photography."
Within six months after the commencement of principal photography on the first film, plaintiffs were obligated to submit seven projects to defendant for consideration. As in the case of the first production, if none of the submissions were satisfactory to defendant, it was obligated to provide a film to plaintiffs to produce. The memorandum of understanding provided a schedule for the commencement of principal photography of the second film. A similar arrangement was specified if there was a third film.
The memorandum also provided a method for computing domestic receipts to be divided between the contracting parties. The memorandum explained the computation process as follows: "By way of example, if a films budget and interest equals $8 million, [plaintiffs] will receive 0% of the gross [revenues] until $4 million in gross revenues are received, and will be accorded 5% of the gross revenue from $4 million to $8 million (i.e. $200,000), and will be accorded 5% retroactively of the gross revenues (i.e., $200,000) from dollar one until $4 million in revenues are received, and will be accorded 5% of the gross revenue[s] in excess of $8 million."
In the event the parties were unable to negotiate the more formal agreement, they agreed to submit the matter to arbitration. The March 21, 1996, memorandum of understanding required that mutual releases be executed along with the formal settlement agreement. The release was to dispose of all claims in the pending lawsuit. The release was also to contain a Civil Code section 1542 waiver. The parties never reduced the memorandum of understanding to a more formal written agreement.
B. The Operative Complaint
On October 25, 2000, plaintiffs secured permission to file the second amended complaint. Plaintiffs alleged: defendant was a California corporation; a codefendant, Village Roadshow Limited, was an Australian corporation involved in the financing and distribution of films; Village Roadshow Limited operated through its division, Village Roadshow Pictures, another codefendant; there was a unity of interest between defendant, Village Roadshow Limited, and Village Roadshow Pictures; another codefendant, John Flock, was a motion picture producer; codefendant, John Flock Productions, Inc., was a California corporation doing business in Los Angeles County and a film production company; and there was a unity of interest between Mr. Flock and John Flock Productions, Inc.
According to the second amended complaint, in 1994, plaintiffs entered into a partnership for purposes of producing motion pictures. On October 4, 1994, plaintiffs filed a lawsuit against: Mr. Flock; his production company; defendant; and Village Roadshow Pictures. The second amended complaint alleged causes of action for: fiduciary duty breach; unfair competition; business relations interference; conspiracy; contract breach; imposition of a constructive trust; and an accounting. On March 21, 1996, plaintiffs and defendants entered into a memorandum of understanding settling their dispute. Under the terms of the March 21, 1996, memorandum of understanding, defendants promised to finance two and possibly three films. On April 9, 1996, plaintiffs dismissed the underlying lawsuit as required by the March 21, 1996, memorandum of understanding.
The second amended complaint alleged defendants breached the March 21, 1996, memorandum of understanding in the following respects: defendants failed to accept any of the proposed film projects; defendants refused to offer any projects; defendants refused to finance the projects they were obligated to under the terms between March 21, 1996, memorandum of understanding; defendants failed to pay the producer fees due under the March 21, 1996, memorandum of understanding; and defendants did not pay the other sums due under the memorandum of understanding. The breach of defendants obligations denied plaintiffs the opportunity to participate in other projects with other parties. Based on these operative facts, plaintiffs alleged causes of action for: contract breach; specific performance; fraud; conspiracy to defraud; business relations interference; and prospective economic advantage interference.
C. The Award
On July 5, 2002, the arbitrator, George E. Marshall, Jr. issued the award. The arbitrator found: defendant was obligated to employ plaintiffs as producers of two motion pictures and perhaps a third film; Mr. Coote, a director of Village Roadshow Limited. and the chief executive officer of defendant, in executing the memorandum of understanding, intended to bind both entities to the agreement; Mr. Coote intended to deceive plaintiffs by executing the memorandum of understanding on behalf of Village Roadshow Pictures; the party that answered the underlying lawsuit, Village Roadshow Pictures Australia Ltd., never did business in the United States; and this was further evidence of deceit on defendants part. Further, the arbitrator found plaintiffs fulfilled their obligations under the memorandum of understanding by submitting proposed projects to defendant even outside the six-month time period in the agreement. Also, the defendant breached the memorandum of understanding by failing to accept any projects submitted by plaintiffs, submit a proposed production to them, and produce at least two films, each with a minimum budget of $6 million. Mr. Coote never intended to comply with his obligations under the memorandum of understanding and he failed to reveal defendant was not developing projects that could be assigned to plaintiffs for production.
Moreover, according to the arbitrator, the breach of the memorandum of understanding by defendant denied plaintiffs: financing for at least two films with the ensuing recognition in the industry that they were active producers; payment of the $450,000 balance payable for the producer fees for the first two contemplated films; gross receipts and net profit participation in films produced under the memorandum of understanding; a third film if the first two productions broke even for which plaintiffs were to receive additional producer fees and proceeds; and if no third film was produced, 7.5 percent of the gross year receipts of the film Bullet which was calculated to be in the sum of $61,441.
The arbitrator assessed damages as follows. The arbitrator relied upon the damage calculation method of Mr. Johnson. Utilizing that damage calculation method, the arbitrator concluded plaintiff was entitled to: $18,850,000 in compensatory damages; $ 4,106,407 for interference with plaintiffs prospective economic relationships; and punitive damages as result of fraud and deceit in the sum of $7,546,875.
D. Superior Court Proceedings
On July 24, 2002, plaintiffs filed a petition to confirm the July 5, 2002, arbitration award. On August 19, 2002, defendant filed a motion to vacate the July 5, 2002, arbitration award. Defendant submitted the 3,659 page arbitration transcript. Virtually none of the 165 exhibits received by the arbitrator into evidence were lodged with the trial court. On October 17, 2002, the trial court granted plaintiffs petition to confirm the arbitration award. At the same time, the trial court denied defendants motion to vacate the arbitration award. On January 13, 2003, the judgment confirming the arbitration award was entered. On March 19, 2003, the trial court entered an amended judgment. Under the March 19, 2003, amended judgment, plaintiffs were awarded a total judgment of $32,107,837.48 consisting of: $18,850,000 in compensatory damages; $4,106,407 in damages for interference with plaintiffs prospective economic relations with third parties; punitive damages in the sum of $7,546,875; and prejudgment interest in the amount of $1,604,555.48. Timely notices of appeal were filed from the January 13, 2003, judgment and the March 19, 2003, amended judgment.
III. DISCUSSION
A. The Contract Breach Award
Defendant argues that the contract breach award must be set aside because it is not based on any evidence thereby violating the rationality requirement of Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 381-383. We reject this contention. Analysis of this issue requires a brief discussion of the applicable standard of review for an arbitrators award. It is presumed that an arbitration award is valid. (Betz v. Pankow (1993) 16 Cal.App.4th 919, 926; Walter v. National Indem. Co. (1970) 3 Cal.App.3d 630, 633.) Defendant had the burden of proving that the arbitrators award was invalid. (Betz v. Pankow, supra, 16 Cal.App.4th at p. 926; National Marble Co. v. Bricklayers & Allied Craftsmen (1986) 184 Cal.App.3d 1057, 1066.)
The limited scope of judicial review of arbitration awards is that set forth in Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 11: "`The merits of the controversy between the parties are not subject to judicial review. [Citations.] More specifically, courts will not review the validity of the arbitrators reasoning. [Citations.] Further, a court may not review the sufficiency of the evidence supporting an arbitrators award. [Citations.] [¶] Thus, it is the general rule that, with narrow exceptions, an arbitrators decision cannot be reviewed for errors of fact or law. In reaffirming this general rule, we recognize there is a risk that the arbitrator will make a mistake." (See Harris v. Sandro (2002) 96 Cal.App.4th 1310, 1313.)
Most of defendants sufficiency of the evidence contentions are barred by Moncharsh. However, defendant argues thatMoncharsh is inapplicable because the arbitrator exceeded his powers pursuant to Code of Civil Procedure section 1286.2, subdivision (a)(4) which states in pertinent part: "[T]he court shall vacate the award if the court determines any of the following: [¶] . . . [¶] (4) The arbitrators exceeded their powers . . . ." Unless one of the enumerated grounds in Code of Civil Procedure section 1286.2 is present, an award may not be vacated even if it contains a legal or factual error on its face which results in substantial injustice. (Harris v. Sandro, supra, 96 Cal.App.4th at 1313; Marsch v. Williams (1994) 23 Cal.App.4th 238, 243-244.) Arbitrators do not exceed their powers when they engage in erroneous reasoning. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 28; Siegel v. Prudential Ins. Co. (1998) 67 Cal.App.4th 1270, 1279.)
The limited standard of judicial review under Code of Civil Procedure section 1286.2, subdivision (a)(4) was described by the California Supreme Court in Advanced Micro Devices, Inc. v. Intel Corp.,supra, 9 Cal.4th at page 383 as follows: "[A]rbitrators, unless expressly restricted by the agreement of the parties, enjoy the authority to fashion relief they consider just and fair under the circumstances existing at the time of arbitration, so long as the remedy may be rationally derived from the contract and the breach. The rights and obligations of the parties under the contract as it was to be performed are not an unfailing guide to the remedies available when the contract has been breached. It follows that parties entering into commercial contracts with arbitration clauses, if they wish the arbitrators remedial authority to be specially restricted, would be well advised to set out such limitations explicitly and unambiguously in the arbitration clause." (See Valley Casework, Inc. v. Comfort Construction, Inc. (1999) 76 Cal.App.4th 1013, 1020.) The scope of an arbitrators powers to interpret the contract and fashion an appropriate equitable remedy was described by the Supreme Court in Intel as follows: "We distill from these cases what we believe is a meaningful, workable and properly deferential framework for reviewing an arbitrators choice of remedies. Arbitrators are not obliged to read contracts literally, and an award may not be vacated merely because the court is unable to find the relief granted was authorized by a specific term of the contract. (Ethyl Corp. v. United Steelworkers of America [(7th Cir. 1985)] 768 F.2d [180,] 184, 186.) The remedy awarded, however, must bear some rational relationship to the contract and the breach. The required link may be to the contractual terms as actually interpreted by the arbitrator (if the arbitrator has made that interpretation known), to an interpretation implied in the award itself, or to a plausible theory of the contracts general subject matter, framework or intent. (Ibid.) The award must be related in a rational manner to the breach (as expressly or impliedly found by the arbitrator). Where the damage is difficult to determine or measure, the arbitrator enjoys correspondingly broader discretion to fashion a remedy. (Local 120 v. Brooks Foundry, Inc. [(6th Cir. 1990)] 892 F.2d [1283,] 1287.)" (Advanced Micro Devices, Inc. v. Intel Corp. , supra, 9 Cal.4th at p. 381, fn. omitted; see Sy First Family Ltd. Partnership v. Cheung (1999) 70 Cal.App.4th 1334, 1346.)
Further, in Moncharsh, the Supreme Court emphasized the limited scope of judicial power to set aside an award because an arbitrator exceeded her or his powers. At one point, the Supreme Court noted while discussing the power of a court to set aside an award when arbitrator exceeds his or her powers: "Moncharsh argues this statutory exception to the rule generally precluding judicial review of arbitration awards applies to his case. It is unclear, however, on what theory Moncharsh would have us conclude the arbitrator exceeded his powers. It is well settled that `arbitrators do not exceed their powers merely because they assign an erroneous reason for their decision. (OMalley [v. Petroleum Maintenance Co. (1957)] 48 Cal.2d [107,] 111; Hacienda Hotel v. Culinary Workers Union (1985) 175 Cal.App.3d 1127, 1133 [].) A contrary holding would permit the exception to swallow the rule of limited judicial review; a litigant could always contend the arbitrator erred and thus exceeded his powers." (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 28; accord, Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 106.) Finally, in Intel, the Supreme Court relied on the award and memorandum of decision in concluding it was rational and not beyond the arbitrators award. The applicable appellate standard of review was described by our Third District Court of Appeal colleagues as follows: "In determining whether an 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. (Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at p. 376, fn. 9; Alexander v. Blue Cross of California (2001) 88 Cal.App.4th 1082, 1087 [].)" (Jordan v. Department of Motor Vehicles (2002) 100 Cal.App.4th 431, 443-444.)
The damage remedy selected by the arbitrator was not irrational nor beyond his powers. The contract breach damage award compensates plaintiffs because defendant failed to abide by its duties to develop two and possibly three films. In Intel, the arbitrator in a technology industry arbitration awarded the plaintiff a permanent nonexclusive royalty free license to the defendants intellectual property which embodied a 36-bit computer chip. Further, the plaintiff was awarded a two-year extension of certain patent and copyright licenses related to the 36-bit computer chip. (Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at pp. 370-371.) The defendant took the position the two foregoing remedies were beyond the arbitrators powers. (Id. at p. 384.) No such issue of an equitable award is present in this case. The monetary contract breach damage award is a traditional remedy available when a contracting party refuses to abide by its contractual obligations. (Civ. Code, § 3300 ; Rest.2d Contracts, § 251.) In terms of the remedy selected by the arbitrator in this case, money damages for a contract breach, Intel is of no assistance to defendant.
Civil Code section 3300 states: "For the breach of an obligation arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom."
We agree with the trial court the arbitration $18,850,000 contract breach award is rational. In Intel, neither the reporters transcript nor the exhibits were produced for judicial review. The arbitrators award and memoranda of decision principally were the documents relied on by the Supreme Court. (Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at p. 367, fn. 1.) The Supreme Court concluded those documents alone were sufficient to prevent the equitable award from being set aside under Code of Civil Procedure section 1286.2, subdivision (a)(4). The arbitration submission, the memorandum of understanding, and the arbitrators award reveal the following. Plaintiffs were to produce up to three films. The budget was to be $6 million per film. The award granted plaintiffs $18 million which would allow them to now produced the three films contemplated by the settlement agreement. Further, the producer fees for all three films totaled $1,050,000. If the third film was not made, plaintiffs would be entitled to 7.5 percent of the "video gross receipts" resulting from Canadian and United States distribution of a motion picture entitled "Bullet." Moreover, plaintiffs were to share in the gross receipts and net profits derived from both the United States and Canadian distribution of the two or three films. The arbitrators award: permits plaintiffs to produce the three films; provides them with their producers fees; allows for potential recovery of 7.5 percent of the "video gross receipts" resulting from Canadian and United States distribution of the film "Bullet"; and permits recovery of the gross and net profits from the United States and Canadian distribution of the two and possibly three films contemplated by the settlement agreement. The arbitrators award is obviously rational. Insofar as defendant attempts to attack the sufficiency of the evidence, its claims are barred by Moncharsh. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 11; OMalley v. Petroleum Maintenance Co., supra, 48 Cal.2d at p. 111.)
Nonetheless, even if the transcript was admissible on the issue of whether the arbitrator exceeded his powers, it demonstrates he acted within the scope of his authority. The reporters transcript indicates that the monetary damage award fell within the parameters of loss calculations provided by a highly educated accountant, Franklin R. Johnson, and Mr. Meeker. None of the key documents which relate to damage calculations were provided to the trial court. Based on part on the incomplete record in this case, which is more extensive than in Intel, defendant has failed to sustain its burden of proving the $ 18,850,000 contract breach damage award must be set aside pursuant Code of Civil Procedure section 1286.2, subdivision (a)(4).
D. Defendant Public Policy Contentions
1. Defendants contentions
Defendant argues that other aspects of the damage award violate public policy and must be vacated in two respects. First, defendant argues that the punitive damage award violates public policy because there was no evidence of its financial condition. Citing the California Supreme Court decision in Adams v. Murakami (1991) 54 Cal.3d 105, 112, a case not involving arbitration, defendant reasons that the absence of evidence as to its financial condition requires the punitive damage award be set aside. (See Romo v. Ford Motor Co. (2002) 99 Cal.App.4th 1115, 1146-1152 [non-arbitration case].) Second, defendant argues that the contract breach award violated the public policy set forth in Civil Code section 3358 which states, "Except as expressly provided by statute, no person can recover a greater amount in damages for breach of an obligation, than he could have gained by the full performance thereof on both sides."
2. Applicable law
Defendant is correct that under exceptional circumstances an arbitration award which violates an explicit legislative expression of public policy may be set aside by a court. In Board of Education v. Round Valley Teachers Assn. (1996) 13 Cal.4th 269, 276-277, the California Supreme Court set forth the parameters of the right of a trial court to set aside an arbitrators award because of a violation of an explicit legislative statement of public policy. In Round Valley, an arbitrator ordered a probationary teacher be granted a hearing despite language to the contrary in Education Code section 44929.21, subdivision (b). The Supreme Court held: "In this case, District asserts both that: (1) it had the statutory right under the Education Code not to retain a probationary teacher without cause or a right to a hearing, and that (2) the entire reelection issue cannot, pursuant to the Government Code, be made the subject of collective bargaining. Therefore, District argues, the subject of the reelection of probationary teachers was improperly included in the collective bargaining agreement at the outset, and thus was never properly subject to the arbitration provisions of the agreement. In short, District asserts the arbitrator exceeded his powers, as that phrase is used in Code of Civil Procedure section 1286.2, subdivision (d), by granting relief pursuant to the terms of the collective bargaining agreement that violated Districts specific statutory rights as set forth in the Education and Government Codes." (Id. at p. 276, original italics.) In response to the argument of the school district, the Supreme Court articulated a narrow exception to the rule of arbitrator finality as follows: "Although we adhere to our holding in Moncharsh that arbitrator finality is the rule rather than the exception, we agree that—if District is correct concerning the scope of its statutory rights under the Education and Government Codes—this case presents the exceptional circumstance that allows for judicial review of the arbitrators decision. Should Districts interpretation of the law prevail, we would be faced with an `explicit legislative expression of public policy that issues involving the reelection of probationary teachers not be subject to arbitration. [Citation.] This expression of public policy would thus conflict with the expressed legislative intent to limit private arbitration awards to statutory grounds for judicial review. Thus, rigidly insisting on arbitral finality here would be `inconsistent with the protection of a partys [i.e., Districts] statutory rights. (Moncharsh [v. Heily & Blase ], supra, 3 Cal.4th at p. 32; see Advanced Micro Devices[, Inc. v. Intel Corp.], supra, 9 Cal.4th at p. 378.)" (Board of Education v. Round Valley Teachers Assn., supra, 13 Cal.4th at p. 277.) The Supreme Court characterized the statutory prohibition against reliance on the collective bargaining agreement as a basis for providing the probationary teacher with a hearing right as "a nonnegotiable and mandatory provision of the Education Code." (Id. at p. 286; see Ajida Technologies, Inc. v. Roos Instruments, Inc. (2001) 87 Cal.App.4th 534, 543, fn. 7 ["arbitrators may not enforce provisions of agreement preempted by statute"].)
Education Code section 44929.21, subdivision (b) states: "Every employee of a school district of any type or class having an average daily attendance of 250 or more who, after having been employed by the district for two complete consecutive school years in a position or positions requiring certification qualifications, is reelected for the next succeeding school year to a position requiring certification qualifications shall, at the commencement of the succeeding school year be classified as and become a permanent employee of the district. [& para;] The governing board shall notify the employee, on or before March 15 of the employees second complete consecutive school year of employment by the district in a position or positions requiring certification qualifications, of the decision to reelect or not reelect the employee for the next succeeding school year to the position. In the event that the governing board does not give notice pursuant to this section on or before March 15, the employee shall be deemed reelected for the next succeeding school year. [¶] This subdivision shall apply only to probationary employees whose probationary period commenced during the 1983-84 fiscal year or any fiscal year thereafter."
Three Court of Appeal decisions have directly applied the public policy analysis in Round Valley. In City of Palo Alto v. Service Employees Internat. Union (1999) 77 Cal.App.4th 327, 333-340, the Court of Appeal analyzed in arbitration award arising out of a collective bargaining agreement. The arbitrator had ordered reinstatement of a municipal employee who had threatened others in the workplace. (Id. at pp. 330-331.) The Court of Appeal found that workplace safety public policy concerns were insufficient to allow a court to overturn the return to work order. (Id. at pp. 334-338.) However, our Sixth District colleagues noted that the employee had been excluded from the workplace pursuant to a Code of Civil Procedure section 527.8 injunctive order. As a result, because the arbitrator purported to overturn a court order, such was violative of a fundamental public policy as specified in the California Constitution. The arbitrators return to work order was set aside as violative of an expressly stated fundamental public policy; the judicial power in article VI of the California Constitution. (Id. at pp. 338-340.) City of Palo Alto was premised in material part upon Round Valley. (Id. at p. 334.)
The second post-Round Valley opinion was Alternative Systems, Inc. v. Carey (1998) 67 Cal.App.4th 1034, 1044, where a lawyer and client had agreed to arbitrate their dispute before the American Arbitration Association. The client contended that the mandatory fee arbitration provisions of Business and Professions Code section 6200 preempted the predispute arbitration agreement. The Court of Appeal held that the Business and Professions Code section 6200 mandatory fee arbitration statute preempted the predispute lawyer client arbitration agreement. (Ibid.) The Court of Appeal ordered that the arbitrators award be set aside.
The third post-Round Valley case to apply the public policy limitation on arbitrators awards wasJordan v. Department of Motor Vehicles, supra, 100 Cal.App.4th at pages 442-456. The Court of Appeal held an arbitration panels attorney $88,479,713 fee award against the Department of Motor Vehicles in a underlying dispute which settled for $ 18 million constituted a violation of the public policy in article XVI, section 6 of the California Constitution. In that case, the Court of Appeal held, "[A]n arbitrator exceeds his powers when he acts in a matter not authorized by the contract or by law." (Id. at p. 443.)
Article XVI, section 6 of the California Constitution states in pertinent part, "The Legislature shall have no power . . . to make any gift or authorize the making of any gift, of any public money or thing of value to any individual, municipal or other corporation whatever; . . ."
3. Punitive damages
The present case is very different from the analysis in Round Valley, City of Palo Alto,Alternative Systems, and Jordan which set aside arbitrators award. At the outset, each of the awards in Round Valley, City of Palo Alto, Alternative Systems, and Jordan involved cases where there were explicit statutory or constitutional impediments to enforcing the arbitrators award. (Board of Education v. Round Valley Teachers Association, supra, 13 Cal.4th at pp. 276-277 [Ed. Code, § 44929.21, subd. (b)]; City of Palo Alto v. Service Employees Internat. Union, supra, 77 Cal.App.4th at pp. 338-340 [constitutional judicial power]; Alternative Systems, Inc. v. Carey, supra, 67 Cal.App.4th at p. 1044 [Bus. & Prof. Code, § 6200];Jordan v. Department of Motor Vehicles, supra, 100 Cal.App.4th at pp. 442-456 [Cal. Const, art. XVI, § 6].) No such explicit statutory or constitutional bar is present in this case. In fact, the relevant statutory provision, Civil Code section 3294 permits the imposition of punitive damages when fraud is committed. (See In re Marriage of Murray (2002) 101 Cal.App.4th 581, 601; American Airlines, Inc. v. Sheppard, Mullin, Richter & Hampton (2002) 96 Cal.App.4th 1017, 1048-1049.)
Civil Code section 3294 states in relevant part: "(a) In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of . . . fraud . . . , the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant. [& para;] . . . [¶] (c) As used in this section, the following definitions shall apply: [¶] . . . [¶] (3) `Fraud means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury."
MOSK, J. Concurring
I concur in the result that seems to be in compliance with current law, but register my concerns with regard to the present state of the law and the unfairness of the result in this case.
1. Compensatory damages
In Moncharsh v. Heily & Blasé (1992) 3 Cal.4th 1, 11 (Moncharsh), the Supreme Court concluded that "with narrow exceptions, an arbitrators decision cannot be reviewed for errors of fact or law." The court said that it recognized there is a risk that the arbitrator will make a mistake, but that the parties "agreed to bear that risk." (Id.) Few would knowingly risk the possibility of the award in this case. No matter how brilliant a presentation by respondents expert, the damages defy common sense.
Under the agreement, respondents were entitled to about $850,000 in fixed fees and then to various profit participations on two and possibly three motion pictures, each having a production budget of $6 million. The compensatory damages award were about $ 23 million. These were comparatively low budget films. They had not even been conceived, there were no identified cast members or directors, and the method of distribution is undefined. Anyone familiar with this business knows that profits on motion pictures are highly speculative, if not improbable. Moreover, respondents profit participation was based on a percentage of the "receipts derived by VRP [appellant] from the exploitation of the U.S. and Canadian distribution rights to the Pictures"—that means the receipts that appellant receives. The third picture was contingent on appellant recouping all its costs in connection with the other two pictures, which not only means that a third picture was uncertain, but also suggests that the parties recognized the possibility that the first two pictures might not even recoup their costs, much less generate a profit.
From this agreement, I find it problematic that one could reasonably predict that respondents would have earned $ 6 million for three pictures—a 100% return on the production budgets. It is also difficult to conceive that the failure to make the three motion pictures further damaged respondents by having some negative effect on their ability to make films in the future. What if the two or three films had been failures?
It is true that under Moncharsh, supra, 3 Cal.4th at pp. 10-11, the award could have been based upon "`broad principles of justice and equity"—ex aequo et bono. But the result in this case does not seem fair to me.
Parenthetically, the Supreme Court in Moncharsh, supra, 3 Cal.4th at pp. 10-11, justified the authority of arbitrators to make awards ex aequo et bono by relying on the following quote from Muldrow v. Norris (1852) 2 Cal. 74 (Muldrow): "`The arbitrators are not bound to award on principles of dry law, but may decide on principles of equity and good conscience, and make their award ex aequo et bono [according to what is just and good]." (Moncharsh, supra, 3 Cal. 4th at 11.) The Supreme Court, however, omitted the next sentence from Muldrow: "If, however, they mean to decide according to the law, and mistake the law, the courts will set their award aside." (Muldrow, supra, 2 Cal. at p. 77.) Arbitrators should not be given license to ignore the law with respect to which the parties have contracted. (See Article 33(2) UNCITRAL Arbitration Rules, Resolution 31/98, Arbitration Rules of the United Nations Commission on International Trade Law ["The arbitral tribunal should decide . . . ex aequo et bono only if the parties have expressly authorized the arbitral tribunal to do so and if the law applicable to the arbitral procedure permits such arbitration"].)
The Supreme Court in Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 377 (Intel), suggested that one of the "narrow exceptions" to the rule that an arbitrators decision is not subject to judicial review is when the question is "whether the remedy chosen is rationally drawn from the contract as so interpreted." Here, the remedy of damages is one that "is rationally drawn from the contract," even if the amount is not. And, as to the amount, while it appears to me to be unreasonable, I cannot say that it fits within whatever the "narrow exceptions" prescribed by Moncharsh.
Apparently, under existing law, the result in this case is a risk one takes in submitting to arbitration. The Supreme Court said that in "return" for the risk, the parties obtained a "quick" and "inexpensive" resolution to their dispute. (Moncharsh, supra, 3 Cal.4th at 11.) This may no longer be a valid premise.
2. Punitive damages
In Intel, 9 Cal.4th at 381, fn. 12, the Supreme Court said "We need not decide here under what circumstances a contractual arbitrator is authorized to award punitive damages." It is not accepted that arbitrators may award punitive damages. (See Cruz v. PacificCare Health Systems, Inc. (2003) 30 Cal.4th 303, 312-313, fn.1.)
The court in Rifkind & Sterling, Inc. v. Rifkind (1994) 28 Cal.App.4th 1282, 1290-1293 held that there were no due process requirements for judicial review of arbitral awards of punitive damages (unlike court punitive damage judgments [see Honda Motor Co. v. Oberg (1994) 512 U.S. 415]), even though there is state action involved in confirming the award. This would mean unwarranted punitive damage awards of, for example, a billion dollars would be immune from judicial review. Can this really be? Here, the award had no rational relationship to the financial condition of the appellant, in violation of Adams v. Murakami (1991) 54 Cal.3d 105, 112. The arbitrator relied upon a net profit report of appellants Australian parent company—a non party to the arbitration. This was contrary to California public policy. (Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1282-1286.) No matter what the relationship of the parent and subsidiary under Australian law, in California, the subsidiary is an entity and the only party to the arbitration.
Nevertheless, under Rifkind & Sterling, Inc. v. Rifkind, supra, 28 Cal.App.4th 1282, an arbitrators punitive damage award can be confirmed no matter how arbitrary and confiscatory. Under that case, a court is able to put its imprimatur upon a violation of public policy.
3. Conclusion
Perhaps appellant should be held accountable for its dishonorable conduct in breaking a contract. But that does not mean that it should be subjected to draconian penalties. Nevertheless, notwithstanding what I consider to be an unjust award, I reluctantly concur because, under the present state of the law, the trial courts may perpetuate such injustice by confirming awards that are contrary to law and public policy and are manifestly unjust.
We need not address the question of whether the transcript of the arbitration may be relied on in assessing defendants public policy argument nor the adequacy of the record provided. We note defendant failed to provide virtually all of the exhibits to the trial court as well as to us. Even if the record is adequate and we can consider the transcript, defendant cannot prevail. There is evidence which was credited by the arbitrator, that the present case involved an abusive example of fraudulent business misconduct: plaintiffs filed the underlying suit against defendant; the underlying suit settled pursuant to a memorandum of understanding which granted them potential lucrative financial returns; pursuant to the memorandum of understanding, plaintiffs dismissed the underlying lawsuit; and plaintiffs were merely informed that defendant would not comply with any of its film production obligations under the memorandum of understanding because of the expense. Further, defendant was a production division of a parent company Village Roadshow Limited, an Australian corporation. Under Australian law, defendant and the parent company were not separate entities. Any significant operational or financial decisions were made by company officials in Australia. There was daily consultation between defendants employees and parent company superiors in Australia. Officers and directors of one company served on the other. A vice president of defendant described various entities as "one company." The net worth of the parent company, Village Roadshow Limited, in 1999 was $640,852,000. Hence, the arbitrator could reasonably conclude: defendant was a corporation whose chief executive officer had no authority other than to pay for "paper clips"; as alleged in the second amended complaint in this case, defendant had no assets and was used as a means to defraud creditors to the benefit of Village Roadshow Limited; Village Roadshow Limited had a net worth of $640,852,000; and the punitive damage award of only $ 7,546,875 was reasonable in the fact of compensatory fraud damages of $18,850,000 and what the evidence credited by the arbitrator indicates is an example of abusive commercial misconduct. (There is no merit to defendants argument no compensatory fraud damage award was returned. The contract breach and fraud damages logically could be the same.)
There are no exceptional circumstances in this case. In Round Valley, the Supreme Court held that a violation of a partys statutory rights warrant judicial review only in "exceptional circumstances." (Board of Education v. Round Valley Teachers Assn., supra, 13 Cal.4th at p. 276.) Further, in City of Palo Alto, the Court of Appeal held that the legitimate workplace safety concerns of the plaintiffs employees were insufficient to set aside the arbitrators award. (City Palo Alto v. Service Employees Internat. Union, supra, 77 Cal.App.4th at pp. 334-338.) This is an ordinary commercial dispute arising out of the defendants admitted breach of the March 21, 1996, memorandum of understanding. There is evidence of fraud and use of corporations to evade liability for legitimate debts. To adopt defendants analysis undermines the strong presumption in favor of private arbitration. In imposing punitive damages the arbitrator did not exceed his powers nor contravene a fundamental constitutional or legislatively established public policy.
4. Civil Code section 3358
There is no merit to defendants Civil Code section 3358 public policy contention. The arbitrator reasonably could have concluded that defendants unjustified contract breach damaged plaintiffs in the sum of $18,850,000. Further, there was evidence of potential lost business opportunity. All defendants remaining claims amount to a deftly packaged yet prohibited reweighing of the evidence. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 11; OMalley v. Petroleum Maintenance Co., supra, 48 Cal.2d at p. 111.)
IV. DISPOSITION
The judgment and amended judgment are affirmed. Plaintiffs, Lance Hool and Charles R. Meeker, are to recover their costs incurred on appeal from defendant, Village Roadshow Pictures (U.S.A) Inc.
I concur: ARMSTRONG, J.