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Second District Vacates Arbitration Award for Failure to Resolve Misappropriation of Trade Secrets Counterclaim

In Arbitration on November 15, 2010 at 11:08 am
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The Second District Court of Appeal vacated an arbitration award for failure to resolve defendants’ counter-claim for misappropriation of trade secrets.  Rad v. Keehan, No. B222049, 2010 WL 4487142 (Cal. App. 2d Dist. Nov. 10, 2010).  Defendants Michael Keehan, Lucy Keehan, Lucy’s Silk Store, Inc. and Michael’s Imports, Inc. (collectively defendants) appealed from a judgment entered after the trial court denied their motion to vacate an arbitration award against them and instead confirmed the award.  Id. *1.  Defendants contended that the arbitrator failed to decide their counter-claim for misappropriation of trade secrets, and thus the trial court should have vacated the arbitration award for failure to resolve all issues submitted to arbitration. Id. The Second District Agreed. Id.

Background

Plaintiff Ira Rad, on behalf of his company Bita LLC, executed an agreement (Sales Agreement) with one of defendants’ corporations, Michael Imports, Inc., to sell and distribute silk products from defendants’ “Lucy’s Silk” label. Id. Bita paid defendants $60,000 as partial consideration for the exclusive right to sell the products in the eastern United States, but after execution of the Sales Agreement, defendants continued to sell the products directly to East Coast customers, undercutting Bita’s sales.  Id. Plaintiffs sued defendants, alleging, inter alia, causes of action for breach of contract, fraud, negligent misrepresentation, and rescission with respect to the Sales Agreement. Id. The parties ultimately stipulated to submit their disputes to binding arbitration and a stay of the litigation was entered. Id.

Defendants filed a cross-complaint for damages against plaintiffs alleging three causes of action for breach of contract, misappropriation of trade secrets, and fraud. Id. Their claim for misappropriation of trade secrets alleged that, based on plaintiffs’ assurances that they would make the payments required by a Stock Purchase Agreement, plaintiffs had been given access to defendants’ customer list compiled over ten years and containing detailed and valuable customer preference information. Id. The complaint alleged that defendants had suffered damages by plaintiffs’ use of the proprietary customer list. Id.

After a three-day hearing, the designated arbitrator issued a “Binding Arbitration Award” (Award) that included detailed findings. Id. *2.  Nowhere in the award did the arbitrator mention the second cause of action for misappropriation of trade secrets alleged in defendants’ cross-complaint, despite the fact that defendants’ arbitration brief and post-arbitration brief each referenced this particular cross-claim. Id. Plaintiffs conceded in their brief that defendants presented evidence in support of the misappropriation claim at the arbitration hearing, including testimony from two witnesses. Id.

The trial court granted the petition to confirm the Award and denied defendants’ motion to vacate it. Id. In response to defendants’ argument that the arbitrator had failed to address their cross-claim for misappropriation of trade secrets, the court noted at the hearing that “this arbitrator was empowered to rule [and t]here’s nothing in the record that indicates that he did not rule.” Id.

Ruling

The court noted that The California Arbitration Act “failure to decide an issue submitted to an arbitrator provides a valid ground for vacating the award.” Id. *3 (citing Mossman v. City of Oakdale, 170 Cal. App. 4th 83, 88 (2009)). Where “parties refer all their differences to arbitration, it is the duty of the arbitrators to pass upon the whole subject in controversy, and if it appears upon the face of the award that they have not disposed of the whole matter but have left a part open . . . it is void and will be set aside.” Id. (citing Elliott & Ten Eyck Partnership v. City of Long Beach, 57 Cal. App. 4th 495, 502-503 (1997)).

The court reasoned that while “an arbitrator is not required to make express findings on each issue. . . . the arbitrator’s award must ‘serve[ ] to settle the entire controversy.’” Id. *3 (citing Sapp v. Barenfeld, 34 Cal.2d 515, 523 (1949)).

The court noted that while “courts may generally “presume[ ] that all issues submitted for decision have been passed on and resolved, and the burden of proving otherwise is upon the party challenging the award” (Rodrigues v. Keller (1980) 113 Cal.App.3d 838, 842 (Rodrigues )), the express language of the Award here renders it impossible to presume that the arbitrator impliedly rejected defendants’ counter-claim for misappropriation of trade secrets.” Id. *4.

The Award erroneously stated that defendants asserted only two cross-claims, for breach of contract and fraud, while omitting altogether any reference to defendants’ cross-claim for misappropriation of trade secrets, even though it is undisputed that this claim was submitted to the arbitrator. The Award then concluded only that defendants had “not met their burden of proof to establish their Breach of Contract cause of action,” and issued no further findings with respect to defendants’ cross-claims. The Award’s explicit reference to only two cross-claims suggests that the arbitrator simply overlooked the third claim for misappropriation of trade secrets. . . . Because the Award does not resolve this controversy, it is incomplete.

Judges and Attorneys

Justice Thomas L. Willhite, Jr. wrote the opinion for the Court.  Presiding Justice Norman L. Epstein and Justice Steven C. Suzukawa concurred.

Appeal from a judgment of the Superior Court of Los Angeles County,  Gerald Rosenberg, Judge.

Sun & Kopicka and Josef L. Kopicka for Defendants and Appellants.

Lurie & Park, Barak Lurie and Michele A. Reikes for Plaintiffs and Respondents.

By CHARLES JUNG

 

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