Class Action Defense Cases-Clark v. First Union: California Appellate Court Affirms Trial Court Order Vacating Referral Of Certain Class Action Claims To Arbitration And Staying Other Class Action Claims

Oct 10, 2007 | By: Michael J. Hassen

Inherent Powers of Trial Court Include Power to Reconsider Interim Rulings Long After the Statutory Time Period for Motions for Reconsideration has Lapsed California Appellate Court Holds

Plaintiffs filed a putative class action against their employer, First Union Securities, and its successor, Wachovia Securities for alleged violations of state labor laws. Clark v. First Union Securities, Inc., ___ Cal.App.4th ___, 64 Cal.Rptr.3d 313, 315 (Cal.App. 2007). Defense attorneys moved to compel arbitration before the National Association of Securities Dealers (NASD) and to stay proceedings on the class action claims for injunctive or declaratory relief, which are not subject to arbitration, see Broughton v. Cigna Healthplans, 21 Cal.4th 1066, 1079-80 (Cal. 1999); the trial court granted the motion. Id. , at 314. After the arbitrators ruled that the class action claims were “not eligible for arbitration,” the trial court sua sponte reconsidered its ruling on the defense motion and ruled that the class action would proceed in state court. Id., at 314-15. Defense attorneys appealed, and the California court of appeal affirmed. The appellate court held that the trial court had the inherent authority to reconsider its ruling referring class action claims to arbitration, that the employment contract did not preclude state court jurisdiction over the putative class action complaint, and that the dismissal of the class action claims by the arbitrators did not constitute a class action waiver.

Plaintiff Clark was hired by First Union as an investment consultant candidate, which required that he hold a license from the NASD and to execute the SEC-approved Uniform Application for Securities Industry Registration or Transfer Form U-4 (Form U-4), which contains an arbitration clause that states “I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the [NASD] as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgment in any court of competent jurisdiction.” Clark, at 315. Plaintiff executed the form in October 1998 and began working for First Union in November 1998, id. The SEC promulgated several rules directly implicated by this case, including Rule 10301(d) which addresses investor class action lawsuits filed under FRCP Rule 23. Id., at 316. As the Court of Appeal noted at page 316, “The SEC issued a public notice in connection with the approval of Rule 10301(d). In this 1992 approval order, the SEC gave notice that under the new provision class actions were excluded from arbitration.”

The class action complaint alleged numerous labor law violations based on an array of alleged misconduct ranging “from misrepresentations regarding the sale of securities, to the failure to pay wages and to reimburse for business expenses.” Clark, at 317-18. Defense attorneys moved to compel arbitration of each cause of action in the class action complaint except the claims seeking injunctive and declaratory relief; the defense argued that “because all allegations arose out of Clark’s employment or termination of employment, they must be resolved in arbitration pursuant to the arbitration provision in the Form U-4 and the NASD Code.” Id., at 318. The appellate court noted that defense attorneys did not cite Rule 10301(d) in support of the motion, id. Plaintiff countered that the NASD arbitration procedures were unconscionable – an issue the Court of Appeal found unnecessary to address – and that because the class action claim for unfair practices was asserted on behalf of all Wachovia employees it was not subject to arbitration. Id. Plaintiff’s lawyer argued, “The only forum for the unfair practice claims is a civil lawsuit. The NASD arbitration rules do not even permit putative or class claims to be arbitrated.” Id.

The trial court granted the defense motion to compel arbitration as to each claim in the class action complaint except the injunctive and declaratory relief causes of action. Clark, at 319. The trial court explained that “the following must be brought in arbitration with the NASD: ‘[c]laims for restitution, damages or disgorgement contained in the seventh and ninth causes of action alleged on behalf of any individual who has signed a Form U-4….’” Id., at 320. The court stayed the class action as to the claims seeking injunctive relief pending resolution of the arbitration proceedings, id. The NASD subsequently dismissed the class action claims as not subject to arbitration, and the individual claims were settled. Id., at 320-21. At a subsequent status conference in the state court proceedings, the trial court raised sua sponte whether it should reconsider its prior ruling compelling arbitration of the class action, and invited plaintiffs’ lawyer to file such a motion. Id., at 321. The reconsideration motion argued that the court order was in error “because class and representative claims were outside the scope of the arbitration agreement.” Id. Defense attorneys argued in part that the NASD arbitrators resolved the class action claims when it dismissed them, id. The trial court disagreed, finding that its decision to reconsider its prior ruling was consistent with the NASD’s ruling dismissing the class action claims as nonarbitrable. Id. Defense attorneys appealed.

The key issue addressed by the appellate court – and the one we focus on here – is whether the trial court had the power to reconsider its prior ruling sua sponte, despite the fact that it plaintiffs’ motion for reconsideration had been filed well outside the statutory time frame governing such motions. Clark, at 322-23. The Court of Appeal held that a trial court’s “inherent powers” includes the power “on its own motion reconsider its interim orders, after providing the parties with notice and the opportunity to be heard.” Id., at 323 (citation omitted). The NASD ruling did not foreclose such reconsideration because the arbitrators simply held that they could not hear the class action claims, it was not a dismissal on the merits. Id. In this regard, the appellate court rejected the defense argument that the NASD had to “explicitly refer the two representative causes of action back to the trial court” and that their failure to do so evidenced an implicit dismissal on the merits. Id., at 323-24.

Once the appellate court determined that there was no procedural bar to the trial court’s action, it had little difficulty in affirming the lower court’s ruling. See Clark, at 325-26. Accordingly, it affirmed the trial court order. Id., at 327.

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