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If Arbitration Is Unaffordable, California Law Provides A New Basis To Challenge It

A recent case provides a powerful new avenue for litigants with limited resources to challenge an arbitration agreement.  This is an important development, as the cost of arbitration alone is prohibitive for litigants.

In Weiler v. Marcus & Milichap Real Estate Investment Service, Inc. (2018) 22 Cal.App.5th 970, the California Court of Appeals addressed the issue of what do when arbitration fees are unaffordable for a party. In Weiler, plaintiff was compelled to arbitration to resolve her lawsuit against a real estate investment company which had represented her in the purchase of a commercial property. The arbitration was set before a three-person panel at an hourly rate of $1,450 per hour.  Pursuant to the arbitration agreement, plaintiff was required to pay 50% of the arbitration costs.  However, after initially proceeding with arbitration, plaintiff asserted that she could no longer afford to pay the arbitration costs and sought relief pursuant to Roldan v. Callahan & Blaine (2013) 219 Cal.App.4th 87.

In Roldan, the plaintiffs were proceeding in forma pauperis and indicated they could not fulfill their contractual duty to pay arbitration fees.  The court balanced the possibility that plaintiffs would be able to pay the arbitration fees with the “very real possibility” that plaintiffs “might be deprived of a forum if they are accorded no relief from these [arbitration] costs.”  (Roldan, supra, 219 Cal.App.4th at 96.)  The court thus, concluded that the possibility of plaintiffs not being able to pursue their causes of action prevailed over sharing arbitration costs.  (Id.)  However, the court concluded that it did not have the ability to require the arbitration forum to waive its fees and thus gave defendants two options: (1) to pay plaintiffs share of the fees or (2) waive their right to arbitration.  (Id.)

In Weiler, the arbitrators ruled it was beyond their jurisdiction to address plaintiff’s request for Roldan relief and referred the question to the superior court.  (Weiler, supra, 22 Cal.App.5th at 975.)  Defendants argued that plaintiff’s request for Roldan relief was actually an unconscionability argument.  (Id.)  Defendants further argued that Roldan was inappropriate because plaintiff failed to bring the matter up when the court originally considered the motion to compel arbitration many years ago.  (Id. at 976.)  Plaintiff argued that the court had to consider her current financial situation.

Although the trial court initially ruled in favor of defendants, the Court of Appeal in Weiler reversed that decision.  The Court of Appeal reasoned that plaintiff’s allegations that defendants were engaged in a “scorched earth policy” and were piling on arbitration costs meant that defendants were effectively hindering plaintiff’s ability to perform under the arbitration provisions.  (Weiler, supra, 22 Cal.App.5th at 798.)  That is to say that by intentionally running up the costs to the point where plaintiff could no longer pay, defendants were hindering plaintiff’s ability to comply with the provision of the arbitration agreement to split costs and that hindrance of a party’s ability to perform under a contract excuses that party’s nonperformance.  (Id. citing Erich v. Granoff (1980) 109 Cal.App.3d 920, 930.)  In addition, the Court of Appeal reasoned that from a public policy standpoint, “a defendant accused of wrongdoing should not be permitted to avoid potential liability by forcing the matter to arbitration and subsequently making it so expensive that the plaintiff eventually has no choice but to give up.”  (Id. at 978-979.)

The Court of Appeal further determined that this was not a matter of unconscionability and that it was error by the trial court to frame the issue as such.  (Weiler, supra, 22 Cal.App.5th at 981.)  The Court of Appeals held that when a party engages in arbitration in good faith but is no longer able to afford to continue in that forum, the court may issue an order permitting the arbitration to continue only if the other party agrees to pay the costs, otherwise, the arbitration shall be deemed to have been “had” and the case may proceed in court.  (Id. at 981.)

Weiler is an important case for all litigants who are subject to arbitration clauses, and cannot afford the cost of arbitration.  In such a situation, Weiler may provide an avenue to avoid arbitration or shift the cost to the opposing party.

(This is an attorney advertisement by Joshua Haffner)

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