THE INCONSPICUOUS FROG CASE – ARBITRATION, DUE PROCESS, AND ATTORNEY’S FEES AND COSTS

THE INCONSPICUOUS FROG CASE – ARBITRATION, DUE PROCESS, AND ATTORNEY’S FEES AND COSTS

In a recent Second Appellate District case out of Ventura County entitled Domestic Linen Supply Co., Inc. v. L J T Flowers, Inc. (2020) (“Domestic”), the court colorfully commenced its opinion with the following language: “An arbitration clause in a contract is as inconspicuous as a frog in a thicket of water lilies.”  Id. at 1. Specifically, the court held that an arbitration clause that is inconspicuously placed in a contract violates the other party’s procedural due process rights and allows for an award of attorney’s fees and costs to the other party if the drafter of the contract later unsuccessfully seeks to petition arbitration in accordance with that clause. As the court later opined, an award of attorney’s fees and costs in such a scenario is consistent with the holding in Frog Creek Partners, LLC v. Vance Brown, Inc. (2012) 206 Cal.App. 4^th 515 (“Frog Creek”).

In Domestic, the plaintiff worked in the uniform rental business and sometime in 2011 the plaintiff contracted with the defendant to supply their uniforms. After a period of approximately three years, the parties had a falling out and the defendant refused to pay the plaintiff. As a result, the plaintiff sought to compel arbitration in accordance with the 2011 contract.

In reviewing the contents of and the facts surrounding the signing of the contract, the court noted the following: The contract between the parties was drafted in eight-point type on a one-page, double-sided document with the arbitration clause placed on the back side without any headers or differentiation from the paragraphs surrounding it. The signature line was placed on the bottom of the first page without a second signature line at the bottom of the second page. Consistent with company policy, the plaintiff’s salesman were trained to have the newly contracting party read aloud a separately required guaranty agreement while the plaintiff signed their portion of the signature line. Additionally, and perhaps most importantly, the plaintiff’s salesman were trained to not separately point out the arbitration clause or to accept a contract that had a signature on the back side.  Upon review, the court felt that, at best, such tactics amounted to a lack of consent as to acceptance of the arbitration clause and, at worst, a nefarious attempt by the plaintiff to have defendant contract away their constitutional right to trial by jury (Cal. Const., art. I, § 16.) In any event, the court found the arbitration clause to be invalid due to a lack of consent.

After the plaintiff’s petition to compel arbitration was denied, the defendant made a motion to be awarded attorney’s fees and costs in accordance with the arbitration clause that the plaintiff had just attempted to enforce. Defendant was successful. On appeal, the plaintiff argued that an award of attorney’s fees and costs was inappropriate because the plaintiff did not breach the arbitration clause and that instead the clause was only held to be unenforceable. In response, the defendant argued that the clause “unilaterally favors” the plaintiff because either the plaintiff is successful on their arbitration claim and they are awarded attorney’s fees and costs or the clause is held to be unenforceable and the plaintiff owes nothing. On appeal, the court agreed with the plaintiff but under an alternative theory.

The court’s alternative theory was to base an award of attorney’s fees and costs in accordance with California Civil Code § 1717, which provides the award to the prevailing party in a contract action. In support of and in opposition to this holding, both the plaintiff and the defendant relied on Frog Creek in their arguments regarding attorney’s fees and costs.

Frog Creek involved a plaintiff that brought an action against the defendant for breach of contract and the defendant petitioned for arbitration and was initially unsuccessful. On a second attempt to compel arbitration, the defendant was successful and then was additionally successful on the merits of the underlying action. The trial court then awarded both the plaintiff and defendant attorney’s fees. On appeal, the Frog Creek court said that there can only one prevailing party for attorney’s fees and costs and that since the defendant won the underlying action then they are the prevailing party. Relying on this reasoning, the Domestic court stated that the defendant was the prevailing party since there was no underlying action in addition to a petition to compel arbitration. Therefore, once the defendant prevailed on plaintiff’s motion to compel arbitration then they simultaneously prevailed on an award of attorney’s fees and costs in accordance with Civil Code § 1717.

Domestic is an important case as it relates to the inconspicuous inclusion of an arbitration clause to a contract. If the drafter is not careful and forthright in their inclusion of an arbitration clause, California case law now holds that there can be serious consequences (i.e. an award of attorney’s fees and costs) if the petition for arbitration is denied and there is no additional underlying action.

Author: Michael J. Mellgren