Arbitration, Sanctions: 4/3 DCA Affirms $50,000 Code Civ. Proc. Section 128.5 Sanctions Awarded Against Client And Attorney For Their Frivolous Litigation and Dilatory Tactics

Broad Language In The Parties’ Retainer Agreement Authorized Arbitrator’s Review Of Ancillary Matters – Such As Litigation Conduct Rationally Related To The Underlying Dispute.

            In ATG Electronics, Inc. v. The Mulcahy Law Firm, Case No. G056931 (4^th Dist., Div. 3 January 16, 2020) (unpublished), Law Firm claiming Former Client owed almost $100,000 in outstanding legal bills demanded arbitration pursuant to the parties’ retainer agreement. In response, Former Client filed a complaint in O.C. Superior Court alleging fraud, breach of fiduciary duty, claims for restitution and declaratory relief – seeking compensatory and punitive damages, and attorney fees.  Law Firm successfully moved to compel arbitration. Former Client then filed a counterclaim against Law Firm, with the same allegations, and a response asserting numerous affirmative defenses against Law Firm’s claim.  In the end, the arbitrator found the case to be a simple dispute about unpaid attorney fees, Former Client’s actions as a “despicable effort to ‘stiff’” Law Firm, Former Client’s affirmative defenses nothing but “red herrings” intended to avoid payment of the legal fees, and Law Firm’s fees as “reasonable and extremely necessary” – awarding Law Firm $119,931.15 in damages, arbitration fees and future interest.  Additionally, the arbitrator awarded $25,000 in monetary sanctions, under Code Civ. Proc. § 128.5, against Former Client and its counsel for what he found to be “bad faith activities or tactics that are frivolous” for the lawsuit filed in superior court, and another $25,000 for asserting affirmative defenses and pursuing a counterclaim that were meritless.

            Former Client (and its counsel) fared no better on appeal of the sanctions award.  In a 3-0 opinion authored by Justice Moore, the 4/3 DCA found the arbitrator had not exceeded his authority – given the broad language in the arbitration provision of the parties’ retainer agreement did not limit the arbitrator’s review and thereby allowed his review of ancillary matters.  Additionally, pursuant to the principles underlying Moncharsch v. Heily & Blase (1992) 3 Cal.4^th 1 and Heimlich v. Shivji (2019) 7 Cal.5^th 350 [reviewed in our May 30, 2019 post], the 4/3 DCA reminded that an arbitrator’s decision is generally not reviewable for errors of fact or law, and that by voluntarily agreeing to arbitration in their retainer agreement, the parties had agreed to bear the risk of uncorrectable legal or factual error in return for a quick, inexpensive, and conclusive resolution to their dispute.