MFAA versus CAA: Jurisdictional traps for the unwary in arbitration

California arbitration is usually one of two types, MFAA or CAA. The rules are sometimes different, sometimes the same. Often there are gaps in one system that are not repeated in the other. It is risky to use procedures from one for the other absent legislative direction, yet there is some cross-referencing that makes borrowing tempting to try to fill in some blanks.

The Mandatory Fee Arbitration Act, found at Business and Professions Code Sections 6200 et seq., is an optional program -- unless a client requests it on time, then it becomes obligatory for a lawyer. Arbitration under the MFAA can be binding if the parties agree to make it so after the fee dispute arises or non-binding if they do not -- but it is "sticky" for lawyers as they cannot safely just ignore the process.

The California Arbitration Act, found at Code of Civil Procedure Sections 1280 et seq., governs private or contractual matters. Under the CAA, the terms of the agreement are usually followed for the arbitration and the arbitration provisions can provide for appeals, discovery as well as the other important factors. The agreement can also determine the venue for a trial de novo after a non-binding MFAA arbitration.

In the last days of May two opinions were filed that explained and changed some of the rules for the CAA and the MFAA. (This article puts aside judicial arbitration pursuant to Code of Civil Procedure Sections 1141.11 et seq., reference procedures under Code of Civil Procedure Sections 638 et seq., and the Federal Arbitration Act.)

The issue before the California Supreme Court in Heimlich v. Shivji, 2019 DJDAR 4663 (May 30, 2019), was the jurisdiction of the arbitrator to entertain a post-award request for costs under Code of Civil Procedure Section 998 in a CAA matter. The arbitrator concluded that he had lost jurisdiction to even consider the request once his final award was made. The Supreme Court found ongoing jurisdiction in the implicit authority contained in the language of Code of Civil Procedure Section 1283.4, which states that an award, "shall include a determination of all the questions submitted to the arbitrators the decision of which is necessary in order to determine the controversy." The court went on to harmonize the CAA and Rule of Court 3.1700(a)(1), allowing costs to be sought within 15 days after issuance of a final award. The court noted that, "[t]his post judgment window allows a party to wait until after a decision on the merits to reveal a 998 offer" and to pursue the costs allowed under Section 1031 and 1032.

The Supreme Court acknowledged clear error of law by the arbitrator on jurisdiction but did not correct that mistake as it was not one that met the test of overturning an arbitration: "The exceptions to the limits on review of [arbitration] awards protect against error that is so egregious as to constitute misconduct or so profound as to render the process unfair."

The Heimlich opinion also reviewed the part of the Supreme Court's previous decision in White v. Westerns Title. Ins. Co., 40 Cal. 3d 870, 887-88 (1985), allowing settlement offers to be considered for purposes other than proving liability, offering this unfortunate language: "[A]lthough a 998 offer is inadmissible to prove liability, it may be admissible [before the merits award] to prove unrelated matters." The court acknowledged that advising a court or arbitrator of a 998 offer before determining liability is ill-advised, yet leaving the above language in the opinion is sure to encourage some parties to submit the offers of settlements to the arbitrator before an award on the merits. Perhaps the court will revise its language at a later date. Either way, the better (and customary) practice is suggested by footnote 8 of Heimlich, which reads in part: "Parties may also agree to jointly tell an arbitrator, before any award is announced that a 998 offer was made and rejected, without identifying the terms or who made the offer. Such notice would permit the arbitrator to designate an otherwise final offer as interim and then consider the parties presentations concerning costs and fees."

One day before Heimlich was filed, the 2nd District Court of Appeal decided Levinson Arshonsky & Kurtz LLP v. Kim, 2019 DJDAR 4682 (May 29, 2019). The Levinson law firm had been representing Kim and his companies for several years when a dispute over fees erupted in 2017. Kim and his lawyer received the notice of a client's right to arbitrate on August 21 and 22 of that year. The notices provided 30 days' time in which to demand fee arbitration or that right would be waived. On October 27, Kim and his companies filed a petition for MFAA arbitration with the local arbitration program at the Los Angeles County Bar Association. The law firm had filed suit on September 28 seeking fees in Los Angeles County Superior Court. After the law firm raised objections to the timeliness of the fee petition, Kim's motion to compel arbitration was brought in the court. The court denied the motion and vacated the automatic stay that filing a fee petition causes. Kim filed a notice of appeal from the court order denying his petition to compel fee arbitration relying upon the right to appeal found in Code of Civil Procedure Section 1294.

Levinson explains that the two arbitration systems have very different methods for compelling arbitration. The CAA is not self-executing, but may require a court to compel arbitration. An order to direct parties to arbitration is not appealable but may be reviewable on appeal from a judgment confirming the award once the arbitration has finished. An order dismissing or denying a petition to compel CAA arbitration may be appealed under Code of Civil Procedure Section 1294. The MFAA has no provision to compel or to appeal the denial of a petition. Instead, the client has a unilateral right to initiate MFAA arbitration within 30 days of receiving notice of a proceeding to recover fees or from the receipt of a notice of a client's right to arbitrate. This petition for arbitration by a client stays any pending litigation and that stay can't be vacated in whole or in part until after a noticed hearing.

The Levinson dispute arose from an MFAA matter in which the appellant sought unsuccessfully to graft the CAA language for appeals onto the MFAA. The panel wrote: "Given the distinct statutory regimes and purpose of the CAA and the MFAA, the lack of authorization for this appeal in the MFAA ...and the Supreme Court's repeated admonition that we should refrain from reading a provision from one statutory arbitration regime into another, we hold that the Code of Civil Procedure section 1294, subsection (a) does not authorize the instant appeal. We therefore lack jurisdiction to hear it."

The MFAA has some cross-referencing provisions to use from the CAA scheme with regard to the confirmation, correction or vacatur of an MFAA arbitral award, but those provisions were not enough to bootstrap the CAA procedural rules for an appeal regarding denying a petition to the MFAA procedure.

The two systems need to be followed as provided and some care needs to be used before attempting to use language from one arbitration program into the other to fill a void in the statutory language or the opinions that have construed the rules. The Supreme Court found that the arbitrator did have jurisdiction to consider the 998 offer in a post-award proceeding while the Court of Appeal concluded it did not have jurisdiction to entertain an appeal in its matter. 