United States: Laymon V. J. Rockcliff, Inc. – An Arbitration Clause Reminder

"California has a strong public policy in favor of arbitration," and therefore, courts generally enforce arbitration clauses unless it is clear that the language of the clause does not cover the asserted dispute. (Coast Plaza Doctors Hospital v. Blue Cross of Cal. (2000) 83 Cal.App.4th 677, 686.) The California Court of Appeal recently reaffirmed this policy on June 9, 2017, in Laymon v. J. Rockcliff, Inc.,  2017 Cal. App. LEXIS 536. In Laymon, the court held that the arbitration clauses in question could be read to reasonably include plaintiffs' allegations against real estate brokers, thereby requiring plaintiffs to arbitrate their claims.

Two sets of plaintiffs brought two materially identical class action lawsuits against their real estate brokers (the "broker defendants") and a group of services providers (the "service provider defendants") (collectively, the "defendants"). The plaintiffs alleged that the broker defendants breached their fiduciary duties while representing the plaintiffs in the sale of their homes. According to the complaints, the broker defendants failed to disclose kickbacks that they received from the service providers in connection with the sales.

The broker defendants filed motions to compel the plaintiffs to arbitrate. Every plaintiff was governed by one of three agreements, and each agreement contained a different arbitration clause. Each arbitration clause required the parties to affirmatively assent to arbitration by initialing the clause. The broker defendants argued that all three arbitration clauses required the plaintiffs to arbitrate their claims, but the trial court disagreed. The court held that the arbitration clauses in the Residential Listing Agreement ("RLA") and the 2007 version of the Residential Purchase Agreement ("2007 RPA") did not cover the claims that the plaintiffs alleged in their complaints. On the other hand, the trial court held that those plaintiffs governed by the 2010 version of the Residential Purchase Agreement ("2010 RPA") were required to arbitrate their claims. The 2010 RPA arbitration clause stated that the parties agreed to arbitration "any dispute or claim . . . arising between them out of this Agreement or any resulting transaction."  

The defendants appealed the trial court's rulings as to the RLA and 2007 RPA, and the plaintiffs cross-appealed the court's ruling with respect to the 2010 RPA. The Court of Appeal agree with the defendants' appeal and reversed the trial court's ruling. Concurrently, the Court of Appeal affirmed the trial court's ruling as to the plaintiffs' cross-appeal—because orders compelling arbitration are not appealable. In reversing the defendants' appeal, the Court of Appeal held that a reasonable reading of the arbitration clauses in the RLA and the 2007 RPA covered the plaintiffs' claims.

The RLA arbitration clause required the client and broker to arbitrate disputes "regarding the obligation to pay compensation." The plaintiffs contended that their claims did not dispute the obligation to pay, but rather that the broker defendants breached their fiduciary duties by not disclosing their additional compensation. However, since the plaintiffs' complaints sought disgorgement, the court found their argument unavailing. According to the Court of Appeal, seeking the remedy of disgorgement constituted a dispute over the plaintiffs' obligation to pay compensation. Consequently, the Court of Appeal concluded that any plaintiffs governed by the RLA were required to arbitrate their claims.

Meanwhile, the 2007 RPA arbitration clause required that the "Buyer and Seller agree to . . . arbitrate disputes or claims involving either or both Brokers." The plaintiffs argued that the clause only required buyers and sellers to arbitrate a dispute with their brokers when the dispute involved both the buyer and the seller. The Court of Appeal disagreed, finding that such a limitation was an unreasonable reading of the arbitration clause. Instead, the Court of Appeal held that a fair interpretation required the buyer and seller to arbitrate any disputes involving their brokers. In the end, since every plaintiff initialed an arbitration clause in either the RLA, the 2007 RPA, or the 2010 RPA, the Court of Appeal found that every plaintiff was required to arbitrate their claims.

In conclusion, Laymon reaffirms California's long-standing arbitration policy: a party hoping to avoid arbitration must demonstrate that the arbitration clause cannot be interpreted to cover the asserted claims. Even still, the case serves as a good reminder to those drafting arbitration clauses. First, it highlights the importance of having the parties sign or initial the arbitration clause separate and apart from the main agreement. Second, it emphasizes the significance of drafting arbitration clauses with clear and unambiguous language. Applying these principles can help prevent the excessive litigation that the broker defendants faced in Laymon.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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