Hunton Employment & Labor Perspectives

In a recent decision, the California Supreme Court refused to overturn an arbitrator’s award, despite finding the award was incorrect.  Specifically, the Court held that an arbitrator should have considered evidence of a rejected section 998 settlement offer and changed its cost award, even after issuing a final arbitration decision.  However, the Supreme Court determined a trial court does not have authority to correct this error. The ruling emphasized the broad scope of an arbitrator’s powers and narrow scope of judicial review when the parties choose arbitration.

Heimlich v. Shivji involved a dispute over legal fees between an inventor and his attorney.  The representation agreement contained an arbitration clause and during arbitration each party asserted claims for money owed.  

Prior to trial, the inventor made an offer to settle the case under section 998 for $65,001. The attorney rejected the offer.  Under California law, the prevailing party is typically entitled to recover their litigation costs.  Section 998 allows a party that might not otherwise qualify as prevailing to still recover costs when the party makes a formal pretrial or pre-arbitration settlement offer that is rejected.  For example, a losing defendant whose settlement offer exceeds the judgment can be treated for purposes of post-offer costs as if it were the prevailing party.  The purpose of this law is to encourage both the making and the acceptance of reasonable settlement offers.

After trial, the arbitrator issued a final decision awarding $0 to both parties and found that neither party was entitled to recovery of fees or costs as both failed to prevail on their claims. The inventor immediately submitted evidence of his section 998 offer and sought recovery of costs as authorized under the statute.  The arbitrator refused to consider the section 998 offer and request for costs, wrongly believing that he no longer had jurisdiction over the matter once his final award was issued.  The inventor sought judicial review, but the trial court determined it lacked authority to alter the award.

In its unanimous decision, the Supreme Court first determined the arbitrator was wrong.  While, in general, an arbitrator cannot amend his or her final award to consider new evidence, there is an exception for section 998 offers.  Such offers should not be considered prior to an arbitrator’s ruling on the merits, as revealing the offer could prejudice the offering party in the mind of the arbitrator.  Thus, a request for costs under section 998 is timely if filed with the arbitrator within 15 days of a final award.

Nonetheless, the Supreme Court ruled that the trial court did not have authority to correct the arbitrator’s error.  Absent the parties’ agreement for review, a court can only overturn an arbitration award when the error is so egregious as to constitute misconduct or so profound as to render the process unfair.  The arbitrator’s clear error in the law did not rise to that level.  The Supreme Court concluded:  “When parties opt for the forum of arbitration they agree to be bound by the decision of that forum knowing that arbitrators, like judges, are fallible.”

This case is a reminder to employers about the tradeoffs of arbitration and the importance of choosing a good arbitrator.  And while this frustrating result may tempt employers to add the right to appeal in future agreements, judicial review can be costly and may diminish one of the primary benefits to arbitration – efficient resolution in a private forum.