Can Franchisors Recover Their Fees for Compelling Abritration?
By Kevin A. Adams on October 28, 2013
Can Franchisors Recover Their Attorney’s Fees For Successfully Compelling Franchisees’ Claims To Arbitration? California Courts Appear To Answer This Question In The Negative.
Over the summer, the California Second District Court of Appeal (in Roberts v. Packard, Packard & Johnson1) and the California First District Court of Appeal (in the unpublished opinion of Abbey v. Fortune Drive Assocs.2) rejected requests for attorney’s fees – finding that attorney’s fee provisions only allow fee awards at the conclusion of the underlying dispute, not when a petition to compel arbitration is decided. This issue of a party’s right to an interim attorney’s fees – i.e., before the underlying merits of the case have been decided – has been debated by the California courts for over 30 years. The California appellate courts have had difficulty reaching a consensus while the California Supreme Court has remained silent.
This rollercoaster of jurisprudence prompted this article, and calls for an answer to the question, “can franchisors recover their attorney’s fees for successfully compelling franchisees’ claims to arbitration?”
In an attempt to answer this question, and provide guidance to our franchisor clients, this article addresses:
- The language of California Civil Code § 1717 – which authorizes courts to award attorney fees under a contractual fee provision;
- The California courts’ historical treatment of interim attorney’s fees requests arising out of a petition to compel arbitration;
- The First and Second District Courts of Appeal’s analysis in the recent cases of Packard and Abbey;
- What, if anything, franchisors can do going forward to increase their chances of recovering attorney’s fees for successfully compelling arbitration. As discussed below, unless franchisors take a proactive approach to this issue, the Packard and Abbey decisions are likely to thwart any interim fee requests into the foreseeable future.
Arbitration provisions have become commonplace in franchise agreements. These broadly worded provisions typically require all disputes “arising out of” or “relating to” the franchise relationship to be arbitrated before a specified ADR service provider. The U.S. Supreme Court has repeatedly directed the courts to “rigorously enforce” these provisions according to their terms.3 Despite the strong presumption favoring the enforcement of arbitration provisions as written, franchisee attorneys still routinely attack the enforceability of these provisions at the state court level.
Irrespective of their prior acquiescence to such terms, franchisees often seek to avoid arbitration because of the daunting administrative and arbitrator fees, the lack of access to a jury, and to escape pro-franchisor arbitration terms, such as, class action and punitive damage waivers. This leads franchisees to disregard the arbitration provision and initiate their claims in state court. Franchisors meet these lawsuits with petitions to compel arbitration, which are routinely granted.
The petition to compel arbitration is a significant undertaking by counsel –consisting of a noticed motion, legal argument, factual declarations and a reply brief – at the expense of the franchisor. In an attempt to recover these fees, franchisors often rely upon the broad attorney’s fee provision in the franchise agreement that allows the “prevailing party” in “bringing or defending” any “action or proceeding” to recover its attorney’s fees and costs of said “action or proceeding.”
This factual setting brings us to the topic of this article: Can franchisors successfully rely upon the attorney’s fee provision in the franchise agreement to recover their fees and costs incurred in compelling arbitration of the franchise dispute? After all, the fees could have been avoided had the franchisee complied with the terms of the franchise agreement.
On one hand, the attorney’s fee provision appears broad enough to allow the franchisor to recover its fees and costs as the “prevailing party” in a discrete “action” to enforce the arbitration provision. On the other hand, the same provision has been interpreted to only permit a fee award after a “prevailing party” is identified for the entire case – i.e., after the underlying merits of the case are decided. The California appellate courts have adopted each of these conflicting positions over the years, citing to California Civil Code § 1717 as support for both positions.
III. California Civil Code § 1717’s “Final Judgment Rule”
Attorneys’ fee requests in connection with a prevailing party provision in a contract are typically analyzed under California Civil Code § 1717 (“Section 1717”). Section 1717 authorizes an award of attorney fees “[i]n any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded … [to] the party who is determined to be the party prevailing on the contract...”4 The “prevailing party” is “the party who recovered a greater relief in the action on the contract,” as determined by the court.5
Section 1717 has been interpreted to provide the courts with authority to award attorney’s fees to the party in whose favor a final judgment had been rendered.6 This became known as Section 1717’s “final judgment rule.” Historically, the “final judgment rule” allowed for an award of attorney’s fees every time a party’s rights under the contract were established in a specific proceeding.7 An example of the application of the “final judgment rule” is reflected in the California appellate court’s 1983 decision of Cole v. BT & G, Inc.8
In Cole, the defendant requested contractual attorney’s fees after successfully moving to vacate a judgment entered against it pursuant to a confession of judgment.9 The trial court rejected the defendant’s request for fees because the merits of the case had not been decided, and therefore, the defendants were not the “prevailing party” as required by Section 1717.10 The California Court of Appeal reversed, finding that Section 1717’s “final judgment rule” does not prevent an award of attorneys’ fees when there are two different actions – “one of the confession of judgment and another on the [underlying dispute in the case].”11 Because “the order vacating the judgment on the confession was a final judgment terminating the proceedings on the confession of judgment and establishing the rights of the parties in those proceedings,” the defendants are entitled to an award of attorneys’ fees.12
Even though the facts in Cole did not include a motion to compel arbitration, the appellate court’s ruling made clear that the courts could award multiple attorney’s fee awards under a single contract. Thus, Section 1717 would allow for multiple “final judgments.”
Understanding that Section 1717 allows for multiple judgments on the same contract, the California courts look to the statute’s definition of “prevailing party” – i.e., “the party who recovered a greater relief in the action on the contract” – to analyze whether a petition to compel arbitration (or similar interim proceeding) is a separate “action on the contract” for purposes of awarding attorney’s fees under Section 1717.13 The appellate courts’ differing interpretations of what constitutes an “action on contract” has primarily contributed to their inconsistent opinions on this topic.
IV. The California Supreme Court Allows Interim Award Of Attorneys’ Fees
In 1983, the California Supreme Court, in Christensen v. Dewor Developments,14 addressed a party’s request for Section 1717 attorney’s fees following a successful petition to compel arbitration. In Christensen, the plaintiffs filed suit against defendants for breach of the parties’ construction contract.15 Notwithstanding the contract’s arbitration provision, the plaintiffs filed a complaint in state court.16 The plaintiffs later acknowledged that they intended to arbitrate the claims, but filed the complaint to “obtain from the defendants an answer and affirmative defenses so that the [plaintiffs] could have some feel for what the defendants’ position would be at arbitration...”17
After significant motion practice, the plaintiffs dismissed their lawsuit, without prejudice, and filed a petition to compel arbitration in a separate lawsuit. The defendants’ opposed the petition by arguing that the plaintiffs – by litigating the first case – waived the right to arbitrate.18 The trial court agreed and denied the plaintiffs’ petition to compel arbitration. The defendants then requested an award of fees consistent with the attorneys’ fee provision in the contract.19 The provision provided that if either party becomes involved in litigation arising out of the contract, “the court in such litigation, or in a separate suit, shall award reasonable costs and expenses, including attorney fees, to the party justly entitled thereto.”20 The trial court denied the request and an appeal ensued.
On appeal, the California Supreme Court reversed the trial court’s denial of attorneys’ fees.21 Relying exclusively upon Section 1717, the Court found that the defendants were the prevailing parties in the second lawsuit – a discrete proceeding involving only the petition to compel arbitration.22 Thus, the attorneys’ fee provision in the contract allowed the defendants “to move, upon notice to plaintiffs, for attorney’s fees in connection with the petition to compel arbitration.” 23
While the Court’s analysis in Christensen leaves much to be desired, the decision makes clear that attorney’s fees under Section 1717 can be awarded when a party defeats a petition to compel arbitration as part of a separate, discrete legal proceeding, thereby terminating the action.
Even with the conflicting appellate court decisions addressing an award of attorney’s fees under Section 1717 – as discussed below – Christensen marks the last time the California Supreme Court would be heard on this topic.
V. The California Appellate Courts Historical Treatment Of Attorney’s Fee Requests In Connection With Petitions To Compel Arbitration
a. Lachkar v. Lachkar (1986)24
In its 1986 decision in Lachkar, the Second District Court of Appealaddressed the availability of contractual attorneys’ fees to a party who successfully compels arbitration. This is an issue of first impression for the court as the Christensen decision dealt with a parties’ successful oppositionto a petition to compel arbitration.
In Lachkar, the plaintiffs commenced a lawsuit by filing a petition to compel arbitration of the parties’ contractual dispute.25 The trial court granted the plaintiffs’ petition, ordered the parties to arbitration, and awarded the plaintiffs’ their attorneys’ fees and costs pursuant to the fee provision in the contract.26 The defendants appealed the award of attorneys’ fees and costs.
The appellate court reversed, finding that the “prevailing party” required by Section 1717 had not yet been determined. “There could be no final determination of the rights of the parties to this action at the time of the motion.” 27 Section 1717 requires “that there be some final disposition of the rights of the parties.”28 In compelling the parties’ dispute to arbitration, “the court was not determining the substantive rights of the parties. Because there was no ‘reckoning of the net success’ of the parties, there was no prevailing party under the parties’ agreements nor pursuant to [Section 1717].”29
According to Lachkar, a prevailing party cannot be identified “until the final termination of the suit.”30 In other words, a court order compelling the dispute to arbitration does not “terminate” the action for purposes of awarding attorney’s fees under Section 1717 because it is all part of the same legal proceeding.
b. Marcus & Millichap Real Estate Investment Brokerage Co. v. Woodman Investment Group (2005)31
Nearly ten years later, the Court of Appeals in the Second Appellate District, in Marcus & Millichap,reached a decision that calls into question the rationale in Lachkar. In Marcus & Millichap, the plaintiffs initiated arbitration against the defendants for commissions owed under a listing agreement.32 The arbitration ensued and the arbitrator ultimately entered an award in favor of the plaintiffs.33
The plaintiffs later initiated a court action to confirm the award. In response to the confirmation proceeding, the defendants moved to vacate the award on the grounds that the arbitrator had exceeded her authority. The trial court agreed with the defendants, (1) vacated the arbitration award, (2) ordered the matter back to arbitration,” and (3) awarded the defendants attorneys’ fees of $33,492.50 “as the prevailing party in the judicial proceedings.34 The plaintiffs appealed the award of attorney’s fees. On appeal, the plaintiffs argued that the trial court’s award was in error “because the underlying dispute between the parties remains unresolved.”35 The appellate court rejected the plaintiffs’ argument and affirmed the trial court’s award.
The appellate court found that a proceeding to confirm or vacate an arbitration award was “distinct” from the arbitration itself.36 Analyzing “prevailing party” within the meaning of Code of Civil Procedure section 1032(a)(4) – stating “a ‘prevailing party’ includes a defendant or other party against whom a complaint has been filed ‘in whose favor a dismissal is entered,’ as well as a defendant ‘as against those plaintiffs who do not recover any relief against that defendant’”37 – the appellate court found that the defendants prevailed on their petition to vacate, “as a matter of law,” and therefore, must be considered “the prevailing party.” 38
Read together, Marcus & Millichap and Lachkar stand for the position that, in the event the underlying merits are still being decided, a prevailing party can be determined on post-arbitration proceedings, but not on pre-arbitration proceedings. Attempting to assimilate the two decisions is stifling. There is no explanation given by the court in Marcus & Millichap to explain such a divergence in position. In fact, the Marcus & Millichap decision does not even reference Lachkar.
Instead, a dissent issued by Justice Woods in Marcus & Millichap more closely conforms to the rationale of Lachkar. In it, Justice Woods argues that the trial court erred in awarding attorneys’ fees in connection with a petition to vacate because “the matter was still pending in arbitration and not final, thereby undercutting the attorney fees clause in the contractual arbitration agreement…”39
At the very least, the Marcus & Millichap decision undermines Lachkar to the extent that an award of attorney’s fees could not be issued until the final termination of the lawsuit. 40 As a result of the court’s simultaneous orders – (1) awarding attorney’s fees to the prevailing party on the motion, and (2) ordering the matter back to arbitration for a final determination on the merits – we know that a matter does not have to be “terminated” before an attorney fees award can issue. Therefore, interim awards of attorney’s fees are allowed.
c. Acosta v. Kerrigan (2007)41
In 2007, the Second District Appellate Court entertained an appeal concerning the issuance of an interim award of attorneys’ fees to a party who successfully compelled arbitration. This time, however, the attorneys’ fee provision in the contract contained specific language allowing for attorneys’ fees immediately following an order compelling arbitration.
In Acosta,a landlord filed suit seeking to recover property from its tenant. The tenant successfully petitioned the court to move the case to arbitration consistent with the arbitration provision in the parties’ Occupancy Agreement.42 The Occupancy Agreement contained a unique attorney fee provision which provided as follows:
- Should any party to this Agreement hereafter institute any legal action or administrative proceeding against the other by any method other than said arbitration, the responding party shall be entitled to recover from the initiating party all damages, costs, expenses, and attorneys’ fees incurred as a result of such action.43
Relying upon this provision, the tenant asked the court for an award of attorneys’ fees, arguing that its “entitlement to recover fees is immediate upon successfully moving the case to arbitration… and is enforceable whether or not [the defendant] is ever a ‘prevailing party’ on the merits at the conclusion of the arbitration proceeding.”44 The trial court agreed and awarded the tenant $60,000 in attorneys’ fees for successfully compelling arbitration. The landlord appealed.
On appeal, the landlord argued that an interim award for attorneys’ fees was impermissible because the merits of the case had not yet been decided.45 Rejecting this argument, the appellate court found that the language of the arbitration provision entitled the tenant to fees for compelling arbitration “even if he loses the case on the merits in the arbitration.”46 Because of this immediate entitlement to recover fees, the defendant “need not wait until the end of the case before filing the claim for fees.”47 It would be “impractical and inefficient” to have an arbitrator decide a fee award arising out of a petition to compel arbitration. “The trial court is in the best position to decide the claim for fees – and the successful party is entitled to recover those fees – immediately after the party prevails on the petition heard by that judge in that court.”48
Acosta once again undermines Lachkar to the extent that an award of attorney’s fees could not be issued until the final termination of the lawsuit. 49 However, because of the unique language used in the attorney fee provision, Acosta appears to be an aberration and not the rule.
d. Otay River Constructors v. San Diego Expressway (2008)50
In 2008, the Fourth District Court of Appeal, in Otay River,expanded upon the California Supreme Court’s decision in Christensen – by finding that a party defeating a petition to compel arbitration is entitled to Section 1717 attorney’s fees as a matter of law.
The relevant facts of Otay River follow: The plaintiff initiated an arbitration proceeding against the defendant in connection with the construction of two highway projects in San Diego. After the defendant refused to participate in the arbitration, the plaintiff petitioned the court to compel arbitration.51 The defendant opposed the motion arguing that the parties’ dispute was not subject to arbitration. The court agreed.52 The defendant followed with a motion for fees and costs as “the prevailing party on the contract because it obtained a final order denying [the plaintiff’s] petition to compel arbitration.”53 The court disagreed, holding that the defendant “was not a prevailing party because the parties contemplated additional litigation.”54 The defendant appealed.
The appellate court reversed the trial court’s denial of fees. The appellate court explained that the plaintiff’s “petition to compel arbitration under the [contract] was an ‘action on the contract’ for purposes of [Section 1717].”55 The defendant’s obtained a “simple, unqualified win on the only contract claim at issue in the action – whether to compel arbitration under the [contract].”56
Citing Christensen, Marcus & Millichap, and Cole, the appellate court found that “courts have awarded attorney fees to a party obtaining an appealable order or judgment in a discrete legal proceeding even though the underlying litigation on the merits was not final.”57 “[A] party who succeeds in obtaining an order denying the petition to compel arbitration is a prevailing party in the action on the contract even though the merits of the parties’ underlying contractual disputes have not yet been resolved.”58
The Otay River analysis appears to reinforce Christensen to the extent that attorney’s fees under Section 1717 can be awarded when a party defeats a petition to compel arbitration – irrespective of the status of the underlying merits of the case.
e. Turner v. Schult (2009)59
One year after the decision in Otay River, the First District Court of Appeal in Turner affirmed an award of attorney’s fees to a party who successfully defeated an independent complaint for declaratory and injunctive relief in an attempt to avoid arbitration. The appellate court, relying upon Otay River and Acosta – and expressly rejecting the analysis in Lachkar –found that:
- [t]he fees at issue were incurred in connection with an independent complaint for declaratory and injunctive relief. … [T]he only issue before the court – whether the arbitration should be allowed to proceed – was resolved in [the defendant’s] favor in this discrete legal proceeding. … [T]he agreement between the parties contemplates the possibility that an action on the contract may be brought in court, and the agreement provides for an award of attorney fees incurred in connection with ‘such action.’ … Under the circumstances, it appears that [the defendant’s] entitlement to attorney fees in this legal action is independent of the outcome of the arbitration of the merits of the underlying dispute, and … we see no reason that an award of fees may not be made now. … Irrespective of who becomes the prevailing party in the subsequent arbitration, there was a prevailing party for purposes of section 1717 in this discrete proceeding on the contract, and the trial court could properly award attorney fees.60
Though the merits of the parties’ dispute had not yet been decided, the Turner court found that the termination of the separate declaratory relief action rendered the company a “prevailing party” for purposes of Section 1717.
By the end of the 2010, case law dictated that Section 1717 attorney’s fees were available to any party that (1) successfully defeated a petition to compel arbitration, or (2) otherwise prevailed in a separate action – to termination of that action – involving the validity of the arbitration provision.
f. Benjamin, Weill & Mazer v. Kors (2011)61
In May of 2011, the First District Court of Appeal issued a controversial 40-page opinion in the case of Kors when it held that defendants who prevail on a petition to compel arbitration filed in a pending lawsuit are routinely entitled to attorney fees even though the plaintiff’s underlying claim to enforce the parties’ contract has not yet been resolved.
Kors involved a fee dispute between a law firm (the plaintiff) and a former client (the defendant). After the client refused to pay her bill, the firm filed a lawsuit in Superior Court for breach of the fee agreement.62 The client then moved to compel arbitration pursuant to the arbitration clause in the fee agreement. The trial court granted the petition and compelled arbitration.
The client thereafter moved for an award of attorneys’ fees pursuant to the fee provision in the parties’ contract. Relying upon Acosta, the client claimed “immediate entitlement to such fees regardless of the outcome of the arbitration.”63 The trial court rejected the client’s request distinguishing it from Acosta on the ground that the court in that case “awarded fees for enforcing an independent provision of the contract, ‘fees to which he is entitled even if he loses the case on the merits in the arbitration.’ There is no such provision in the case at bar.”64 An appeal ensued.
After analyzing Acosta, Otay River, Turner and Christensen, the appellate court reversed the trial court’s denial of fees.65 The appellate court reasoned that the petition to compel arbitration was an “action on the contract” for purposes of Civil Code section 1717. “[The client] obtained an unqualified victory on the only contract claim at issue in the action – whether to compel arbitration under the fee agreement. Accordingly, [the client] was the prevailing party as a matter of law because she defeated the only contract claim before the trial court in that discrete special proceeding.”66
The court also found the trial court’s distinction between the unique language of Acosta’s attorneys’ fee provision and the language of the attorneys’ fee provision before it, “not meaningful.” The fee provision in Acosta “is functionally equivalent” to the provision at issue here as both fee provisions create “a right to recover attorney fees for prevailing in ‘[a]ny dispute regarding any aspect of [the agreements].”67
The Kors court also rejected Lachker, indicating that Lachker is no longer viable because it was decided under an earlier version of Section 1717 – when the “prevailing party” was defined as “the party who is entitled to recover costs of suit.”68 Since Lachker was decided, Section 1717 was amended to define the “prevailing party” as “the party who recovered a greater relief in the action on the contract.”69 It was this slight alteration to the language of Section 1717 that provided the Kors court with a basis to disregard Lachker.
On August 17, 2011, the California Supreme Court in Kors denied the law firm’s request for review and de-publication of the appellate court’s decision.
After Kors, the prevailing party on any action to compel arbitration under a contract was arguably entitled to an award of attorney’s fees.
g. Frog Creek Partners, LLC v. Vance Brown, Inc. (2012)70
Just one year after deciding Kors, the First District Court of Appeal reached a contrary conclusion.In Frog Creek, the defendant moved to compel arbitration of the plaintiff's breach of contract lawsuit. The trial court denied the petition.71 Following two separate appeals, the appellate court ultimately directed the trial court to grant the defendant’s petition and send the dispute to arbitration.72
The defendant later prevailed in the arbitration, but the arbitrators declined to rule on the parties’ right to attorney fees arising out of their pre-arbitration dispute.73 As a result, the parties filed cross-motions for fees under Section 1717 with the trial court. The defendant’s cross-motion sought all pre and post-arbitration attorney’s fees as the prevailing party on the merits of the case. The plaintiff’s cross-motion requested the fees it incurred in successfully defeating the defendant’s initial petition to compel arbitration. The trial court awarded both parties attorneys’ fees under their respective theories of entitlement.74 The defendant appealed.
As part of its 32-page opinion, the appellate court reversed the trial court’s award of fees to the plaintiff “because [the defendant] prevailed on the contract action overall; [and] the Legislature did not intend to authorize multiple attorney fees awards to multiple prevailing parties on a single contract in a given lawsuit.”75 In the course of its analysis, the appellate court distinguished both Otay River and Turner from the facts of Frog Creek, concluding that these decisions “confirm that attorney fees should be awarded to the party who prevails on a petition to compel arbitration only when the resolution of that petition terminates the entire ‘action on the contract.’”76
The court also announced that it “respectfully disagree[d] with the reasoning of [Kors].” In the procedural context of Kors, “the implication of the quotation seems to be that a petition to compel arbitration filed in a pending lawsuit constitutes a ‘discrete action’ providing a basis for a Civil Code section 1717 attorney fee award, even though that could result in multiple prevailing parties on one contract in a given lawsuit. Neither the legislative history nor Turner supports that interpretation of Civil Code section 1717.”77
Frog Creek breathed new life into Lachkar – thereby limiting a party’s right to Section 1717 attorney’s fees only when the underlying action is terminated, and not when arbitration is compelled.
VI. The Recent Court Decisions of Packard And Abbey
The First and Second District Courts of Appeal both relied upon Frog Creek’s narrow interpretation of Section 1717 to reverse awards of attorney’s fees to parties prevailing on the action to enforce the arbitration provision of the underlying contract.
In Packard (July 3, 2013), the plaintiffs filed a lawsuit against their former attorneys for breach of fiduciary duty, conversion, and declaratory relief. The attorneys petitioned to compel arbitration pursuant to the parties’ contingency fee agreement. The trial court granted the petition. The attorneys later petitioned the court for an award of attorney’s fees pursuant to the fee provision in the parties’ agreement. The trial court granted the request, and the plaintiffs appealed.
On appeal, a three-judge panel sitting in the Second Appellate District reversed the trial court’s award of fees. Relying upon Frog Creek, the court found that “because only one side – plaintiffs or their former attorneys – can prevail in enforcing the contingency fee agreement, the determination of the prevailing parties must await the resolution of the underlying claims by an arbitrator. Attorney fees can be awarded only to the parties that prevail in the ‘action.’”78 Because a party’s successful petition to compel arbitration does not terminate the “action,” there is no “prevailing party” for purposes of allocating attorney’s fees under Section 1717.
After Packard was decided, the First District Court of Appeal issued an unpublished decision in Abbey79 on July 29, 2013. In Abbey, the plaintiff filed a lawsuit in San Francisco Superior Court against the company for his involuntary termination from involvement with the business activities of the company.80 Before the complaint was served, the company initiated an arbitration proceeding pursuant to the arbitration provision in its Operating Agreement.81 The shareholder thereafter served the company with the lawsuit. The company objected to the suit on the grounds of improper venue – i.e., the company was located in San Mateo County, not San Francisco County. Meanwhile, the company moved forward with the arbitration over the plaintiff’s objection.82
Concerned about the progress of the arbitration, and his inability to timely move the court to transfer venue, the plaintiff filed a second lawsuit in San Mateo County seeking to enjoin the arbitration and for a judicial declaration that the plaintiff was not bound by the arbitration provision in the Operating Agreement.83 The San Mateo court granted the plaintiff’s request, stayed the arbitration and entered judgment in favor of the plaintiff on the request for declaratory relief. 84 The plaintiff then filed a request for attorneys’ fees under the fee provision in the Operating Agreement.85 The trial judge granted the plaintiff’s request for fees incurred in connection with the declaratory relief action.86 The company appealed.
On appeal, the company argued that the case should be governed by the general rule set forth in Frog Creek – i.e., “there may be only one prevailing party entitled to attorney fees on a given contract in a given lawsuit.”87 Applying this rule, the company argued that “the prevailing party entitled to attorney fees must be determined by the outcome of the merits lawsuit.”88 This is the same argument rejected in Kors, Acosta, Otay River and Turner. The plaintiff argued that he was entitled to an award of fees “without regard to the merits lawsuit” because he prevailed in the “different” and “discrete” declaratory action.89
After addressing Otay River and Turner, the court implicitly abandoned those decisions and announced that it “share[s] Frog Creek’s concern with permitting an award of fees independent of the outcome of the underlying contractual litigation when, as here, the underlying contractual litigation was pending at the time the independent action was filed.”90 The decision fails to even reference Kors.
Every case cited above, with the exception of Lachker, finds that attorney’s fees can be awarded following the termination of the action on the contract. In an effort to distinguish this case from those cited above, the appellate court in Abbey finds that the plaintiff could have filed the request for declaratory relief in the underlying case on the merits, but instead, filed a separate, discrete action. “When the availability of arbitration is litigated in a discrete action only because the party seeking attorney fees voluntarily elected to file a separate action, rather than raise the issue in a pending contractual lawsuit, there is no basis for departing from the rule of one prevailing party.”91
Even though it is an unpublished decision, attorneys attempting to avoid the “one prevailing party” by filing a second lawsuit – either for declaratory or injunctive relief – to compel arbitration have to be concerned about Abbey’s underlying rationale. If the requested relief can be filed in the underlying merits lawsuit, it may not be considered a “separate action” for purposes of finding a prevailing party.
The California courts’ historical treatment of attorney’s fee requests following an interim decision on the enforceability of the arbitration provision has been an unpredictable rollercoaster ride. With the exception of Kors, the California Supreme Court has not been asked to intervene since its 1983 decision in Christensen. The recent decisions of Frog Creek, Packard and Abbey suggest that interim attorney’s fee awards will not be handed out unless the underlying lawsuit is terminated.
In an attempt to avoid the recent line of cases, franchisors should seriously consider revising their attorney’s fee provisions consistent with Acosta – i.e., drafting specific language that specifically provides the prevailing party to fees for compelling (or defeating) arbitration even if that party loses on the underlying merits in the arbitration. According to Acosta, language to this effect immediately entitles a party to recover its fees.92 The rationale of Acosta has never been rejected.
Absent this change to the attorney’s fee provisions, franchisors should not expect an award of attorney’s fees unless they prevail on the underlying merits of the parties’ dispute.
Roberts v. Packard, Packard & Johnson, 217 Cal. App. 4th 822 (July 3, 2013).
Abbey v. Fortune Drive Assocs., 2013 Cal. App. Unpub. LEXIS 5320 (July 29, 2013).
See Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2306 (2013); Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213 (1985); see also Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 (2006) (All doubts as to whether an arbitration clause applies to a particular dispute are to be resolved in favor of sending the parties to arbitration.).
California Code of Civil Procedure § 1717(a).
California Code of Civil Procedure § 1717(b)(1).
See Cole v. BT & G, Inc., 141 Cal. App. 3d 995 (Cal. App. 2d Dist. 1983); Beneficial Standard Properties, Inc. v. Scharps, 67 Cal. App. 3d 227 (Cal. App. 2d Dist. 1977).
Cole v. BT & G, Inc., supra, 141 Cal. App. 3d at 998-999 (the court awarded the defendants their attorneys’ fees under Section 1717 even though the underlying merits of the case had not been decided after the rights of the parties had been established in a separate action on the contract).
141 Cal. App. 3d 995 (Cal. App. 2d Dist. 1983).
Id. at 998.
Id. at 999.
California Code of Civil Procedure § 1717(b)(1).
Christensen v. Dewor Developments, 33 Cal.3d 778 (1983).
33 Cal.3d at 780.
Id. at 781.
Id. at 786.
Id. at 786-787.
Id. at 786.
Lachkar v. Lachkar, 182 Cal App 3d 641 (Cal. App. 2d Dist. 1986).
Id. at 644.
Id. at 645.
Id. at 646-647.
Id. at 648.
Id. at 648 (internal citations to Code of Civil Procedure § 1717).
Lachkar, 182 Cal App 3d at 648.
Marcus & Millichap Real Estate Investment Brokerage Co. v. Woodman Investment Group, 129 Cal. App. 4th 508 (Cal. App. 2d Dist. 2005).
Id. at 510.
Id. at 511.
Id. at 511-512.
Id. at 512.
Id. at 514.
Id. at 514.
Id. at 514.
Id. at 519.
Lachkar, 182 Cal App 3d at 648.
Acosta v. Kerrigan, 150 Cal. App. 4th 1124 (Cal. App. 2d Dist. 2007).
Id. at 1126.
Id. at 1128-1129.
Id. at 1132.
Id. at 1133.
Lachkar, 182 Cal App 3d at 648.
Otay River Constructors v. San Diego Expressway, 158 Cal.App.4th 796 (Cal. App. 4th Dist. 2008).
Id. at 800.
Id. at 801.
Id. at 807.
Id. at 807.
Id. at 799.
Turner v. Schultz, 175 Cal. App. 4th 974 (Cal. App. 1st Dist. 2009).
Turner v. Schultz, supra, 175 Cal.App.4th at 983–984 (internal citations omitted).
Benjamin, Weill & Mazer v. Kors, 195 Cal. App. 4th 40 (Cal. App. 1st Dist. 2011).
Id. at 48.
Id. at 49.
Kors, 195 Cal. App. 4th at 75.
Id. at 47–48.
Id. at 77.
Kors, 195 Cal. App. 4th at 75 (citing to Acosta, 150 Cal. App. 4th at 1126.
Kors, 195 Cal. App. 4th at 79.
Frog Creek Partners, LLC v. Vance Brown, Inc., 206 Cal. App. 4th 515 (Cal. App. 1st Dist. 2012).
Id. at 521-522.
Id. at 522.
Id. at 523.
Id. at 526.
Frog Creek, at 531-532 (The court characterized the Otay River decision as holding, “when a party defeats an independent petition to compel arbitration, the action is terminated and the prevailing party on the petition is entitled to fees under Civil Code section 1717.” The court was more discrete in its explanation of Turner, noting in a footnote: “Turner is consistent with our interpretation of Civil Code section 1717: there may be only one prevailing party entitled to attorney fees on a given contract in a given lawsuit. However, in light of Turner’s somewhat unusual procedural posture, in which a pending lawsuit addressed the substantive contractual claims involved in the independent action, we express no opinion on the court’s conclusion that a fee award was proper in the circumstances of that case.”).
Frog Creek, at 536-537.
Roberts v. Packard, Packard & Johnson, 217 Cal. App. 4th at 842 (citing Civ. Code, § 1717(a) & (b)(1)).
Abbey, 2013 Cal. App. Unpub. LEXIS 5320, *20-21.
Abbey v. Fortune Drive Assocs., 2013 Cal. App. Unpub. LEXIS 5320, *1-2 (July 29, 2013).
Id. at *2.
Id. at *3.
Id. (The opinion was appealed and the appellate court affirmed the stay and found that the arbitration clause was not enforceable against the plaintiff.)
Id. at *4.
Id. at *5.
Id. at *9.
Abbey, 2013 Cal. App. Unpub. LEXIS 5320, *16.
Id. at *17.
Acosta v. Kerrigan, 150 Cal. App. 4th at 1126.