Arbitration: A Motion to Compel is Reinstated After Being Struck on California Free (Web)

The California Sixth District Court of Appeals of California held that Code of Civil Procedure Section 425.16 doesn’t authorize a court to grant a motion to strike an arbitration claim filed only in an arbitral forum, and not asserted by the claimant in any complaint or cross complaint filed before the court. Sheppard v. Lightpost Museum Fund, Docket No. H029574,

2006 WL 3824896 (Dec. 29, 2006)(available at http://www.courtinfo.ca.gov/opinions/documents/H029574.PDF).

By reversing the Santa Clara County Superior Court, the unanimous three-judge appellate panel denied plaintiff Terrance J. Sheppard's motion to strike an arbitration claim, based on a free speech claim. The request to compel arbitration had been asserted by his former employers, Lightpost Museum Fund and Art for Children Charities Inc., who are the defendants.

Sheppard had entered into employment agreements with the defendants, each of which had a nondisclosure clause that remained applicable “at any time after [Sheppard] leaves employment. . . .” The agreements also provided for binding arbitration before the Christian Dispute Resolution Professionals Inc., a Tustin, Calif., ADR provider.

Sheppard's employment was terminated in 2003, and in 2004, his wrongful termination claim, and the defendants’ breach of contract and declaratory relief claims, were submitted for arbitration. But the arbitrator didn’t award relief to either side.

In April 2005, the defendants sent a letter to CDRP requesting the arbitrator to “revisit” their claim that Sheppard's violated the nondisclosure clause in their agreements. The former employers asserted that, according to the opinion, “after the 2004 arbitration, Sheppard, as a third party witness, had turned over confidential documents and testified about confidential information in arbitration proceedings, and had expressly stated that he was not bound by the non-disclosure clauses.” The proceedings in the allegation were unrelated to the arbitration between the case parties that resulted in a no decision.

The CDRP deemed the defendants’ April 2005, letter, as a new demand for arbitration. The provider notified Sheppard, who did not respond.

In May 2005, Sheppard he filed a complaint alleging tort claims against the defendants before the Santa Clara County Superior Court, and seeking declaratory relief. The following month, Sheppard also filed a special motion to strike the arbitration claim pending before the CDRP in accordance to the Code of Civil Procedure § 425.16.

The defendants demurred to three of the four causes of action in Sheppard’s complaint, and filed a motion to compel arbitration. The motion was based on the defense assertion that Sheppard’s declaratory relief cause of action was the same as the claim pending in arbitration, and therefore he should be compelled to arbitrate in accordance with the employment agreement.

In August 2005, the defense opposed the former employee’s motion to strike arbitration, and Sheppard filed opposition to the defense motion to compel arbitration.

Two months later, the Superior Court reasoned that both motions are opposite sides on the same point. The trial court divided the defendants’ and plaintiff's arbitration claim into two parts: The first part was that Sheppard possessed confidential documents belonging to the defendants, which the defendants had a right to have returned.

The second part of the arbitration claim was that Sheppard disclosed confidential information at arbitration hearings without a subpoena, and was writing a book regarding such confidential information.
The trial court ruled that the first part of the arbitration claim was subject to arbitration and the second part of the arbitration claim, which was never asserted in a complaint or cross complaint or filed in court, was within the court’s jurisdiction under Section 425.16, and subject to Sheppard’s strike motion.
The court granted the defense motion to compel arbitration on the first part, and granted the Sheppard motion to strike the arbitration claim in the second part, because it implicated the plaintiff’s free speech rights..

The former employers filed a notice of appeal from the court's order partially granting Sheppard's motion to strike the arbitration claim.

The Sixth District Court of Appeals, in an opinion by Acting Presiding Justice Nathan D. Mihara, analyzed the defense appeal based on whether the Superior Court has the right to strike all or part of an arbitral claim filed before an arbitration forum.

First, the panel notes, Section 425.16, subd. (a) targets “abuse of the judicial process.”

The statute’s subd. (b)(1) says that a cause of action against a person “arising from any act of that person in furtherance of the person’s right of petition or free speech . . . in connection with a public issue” is subject to a special motion to strike.

But, the appellate decision points out, the section contemplates the strike motions for complaints, cross complaints, or petitions, and “does not expressly make arbitration claims asserted only in an arbitral forum ‘subject to’ a motion to strike.”

The appellate court writes that it considers arbitration claims as similar in some ways to pleadings, but they also “are very different since they are not filed in courts and they do not initiate judicial proceedings.” (Emphasis is the court’s.) “These distinctions indicate that the Legislature did not intend to include such claims within the term ‘complaint,’” the opinion adds. In addition, Section 425.16 requires a motion to strike to be brought within a certain time period after complaint is served. The term “service of complaint” refers to the means by which the court obtains jurisdiction over a defendant, the opinion states, finding that since arbitration claims are filed in private arbitral forums, they are not subject to such jurisdictional limits.

The opinion’s analysis ends where it began, noting the Legislature’s intent in Section 425.16 is to target abuse of the judicial process. “Private arbitration are not part of the judicial process,” the panel holds, “they are “nonjudicial” proceedings.”

The panel vacated the trial court decision, and directed it to enter a new order denying Sheppard's motion to strike in its entirety.

Associate Justice Richard J. McAdams, concurred, noting that despite the “inartful pleadings,” the case was really about a disagreement over proceeding to arbitration: The former employers saw a breach of employment contract case that should be sent to arbitration, while “the former employee claimed he was being forced into arbitration for engaging in constitutionally protected activity.”

McAdams writes that he would have remanded for further trial court consideration of the arbitrability issue.

–Julie John, CPR Intern