Northwest Business Litigation

Oregon Court of Appeals upholds arbitration clause in employment contract

The Oregon Court of Appeals has again enforced an arbitration clause in an employment contract, rejecting the employee's claim that the clause is unconscionable.  In Livingston v. Metropolitan Pediatrics, LLC, the plaintiff, a pediatrician, took issue with the conduct of his employer and other doctor members and employees related to an investigation of the clinic's child vaccine program.  He alleged he was ultimately terminated because of the concerns he expressed to his employer and government authorities. 

Plaintiff filed common law and statutory employment claims against his employer and the others in court.  The employer moved to abate the claims and compel arbitration, citing a clause in the employment agreement that required arbitration of "[a]ny controversy, dispute or disagreement arising out of or relating to this Agreement, or the breach thereof."  The trial court denied the employer's motion, ruling that the arbitration clause is "unconscionable" and, therefore, unenforceable.  The employer appealed, and the Court of Appeals last week agreed with the employer and sent the case back for arbitration of all claims.

The test for "unconscionability" in Oregon has two parts, one procedural and the other substantive.  A contract is procedurally unconscionable, and therefore not enforceable, if there is "oppression" or "surprise" in the "conditions of contract formation," but unequal bargaining power alone is insufficient for a finding of procedural unconscionability.  A contract is substantively unconscionable if the "terms" of the contract are "unreasonably" one-sided, such that their "effect" makes the parties' respective obligations "so unbalanced as to be unconscionable."

In this case, Plaintiff did not contend that the agreement was procedurally unconscionable; the Court of Appeals noted that, in any event, because plaintiff is a highly educated physician, any inequality in bargaining power was minimal.  The trial court, however, had found these aspects of the agreement substantively unconscionable:  (1)  the possibility that plaintiff would have to pay defendant's attorney fees and costs if plaintiff is unsuccessful on his "blacklisting" claim; (2)  excessive arbitration fees assessed against plaintiff; (3)  ambiguity about which set of American Arbitration Association rules would govern the arbitration; and (4) a requirement of confidentiality.  Before the Court of Appeals, plaintiff asserted these and other grounds for a finding of unconscionability and further argued that the arbitration clause should not apply to intentional torts, statutory claims, and claims against non-signatories to the employment agreement.  The Court of Appeals addressed the trial court's findings as well as the other arguments put forth by plaintiff, and held that none of the concerns arises to the level of substantive unconscionability or otherwise requires court litigation of the parties' disputes.  Central to the ruling of the Court of Appeals is the very broad language of the arbitration clause allowing for arbitration of "any controversy, dispute or disagreement."

Homeowner may sue for negligent construction, Oregon Court of Appeals holds

A homeowner who discovers construction defects may be unable to pursue the builder on a contract theory if too much time has passed and the statute of limitations has run.  And, even if the statute of limitations on a tort claim would be delayed by the homeowner's belated discovery of the defect, under the economic loss doctrine no negligence claim is available unless there is a "special relationship" between the builder and the homeowner.  (See our earlier discussion of the economic loss doctrine here.)  The lack of a special relationship associated with an ordinary construction contract typically makes it impossible for a homeowner to pursue a negligence claim.

But a panel of the Oregon Court of Appeals held earlier this month that an aggrieved homeowner may be able to pursue a negligence per se claim on the theory that the builder violated the Oregon Building Code.  In Abraham v. T. Henry Construction, Inc., the homeowners discovered the defects more than six years after construction, making a contract claim untimely under ORS 12.080(1).  The court observed that plaintiffs may nonetheless state a valid negligence claim it they can allege a breach of a standard independent of the terms of the contract.  Plaintiffs identified such a standard in the Building Code, and asserted that the purpose of that Code is to protect homeowners such as plaintiffs.  Based on the claim that the builder had caused damage to the home by violating the Building Code, the Oregon Court of Appeals reversed summary judgment for the builder and remanded the case for trial.

Ninth Circuit voids class action waiver in a consumer contract

Last week in Chalk v. T-Mobile USA, the Ninth Circuit Court of Appeals applied Oregon law to invalidate a contractual class action waiver.  The court held that, where individual damages from breach of a consumer contract are likely to be small, a waiver of the right to pursue a class action is substantively unconscionable and therefore unenforceable.

This case was filed in the federal district court in Oregon in 2006 by a plaintiff who bought a wireless internet plan and card from T-Mobile.  The service agreement provided for arbitration under the American Arbitration Association’s Wireless Industry Arbitration Rules.  The arbitration clause barred class-wide proceedings.  When the plaintiff could not get the wireless internet card to fit in her laptop, she commenced a putative class action against T-Mobile, alleging a violation of Oregon’s Unlawful Trade Practices Act (UTPA).  T-Mobile moved to compel arbitration pursuant to the service agreement.

In opposing the motion, the plaintiff argued that the bar on class-wide proceedings rendered the arbitration agreement unconscionable and therefore unenforceable. The district court rejected this argument and upheld the waiver.  The plaintiff also argued that the costs of arbitration would be prohibitively expensive and preclude her from vindicating her statutory rights.  The Court rejected this argument because the plaintiff did not present any evidence to support her cost estimates.

The district court did find merit in the plaintiff's argument that the arbitration agreement was unconscionable because it would prevent the arbitrator from awarding her attorney fees pursuant to the UTPA.  Instead of invalidating the arbitration agreement, however, the Court severed those provisions that would prevent the arbitrator from awarding attorney fees to the plaintiff.

On appeal, the Ninth Circuit relied on Vasquez-Lopez v. Beneficial Oregon, Inc., an Oregon Court of Appeals case decided after the district court issued its ruling.  Applying Vasquez-Lopez, the court held the class action waiver was substantively unconscionable and unenforceable under Oregon law due to its one-sided nature.  Class action waivers unfairly prevent individuals from vindicating their rights when the cost of pursuing each claim individually outweighs the potential relief, according to the court.  The court was careful to note that it did not hold that all class action waivers are necessarily unconscioniable.  Finally, because the arbitration agreement prohibited severance of the waiver, the court ruled the agreement as a whole unenforceable.

See our January 2007 coverage of the Vasquez-Lopez case here.

Oregon Supreme Court finds no right to jury trial for enforcement of settlement agreement

In McDowell Welding & Pipefitting, Inc. v. U.S. Gypsum Co. et al., the Oregon Supreme Court recently held that specific enforcement of a settlement agreement taking the form of an executory accord is an equitable claim, as opposed to a legal claim, and is not subject to a jury trial.

The case involved a dispute over the defendants’ alleged failure to pay for work that plaintiff had done on a construction project. In answer to the plaintiff’s allegations, the defendants claimed as an affirmative defense that plaintiff had agreed to release its claims in return for an agreed-upon sum. The defendants also counterclaimed for specific performance of the settlement agreement. On the defendants’ motion, the trial court agreed to try defendants’ counterclaim for specific performance of the settlement agreement before trying plaintiff’s claims for breach of the construction contract.

In holding that the plaintiff did not have a constitutional right to a jury trial on the issue of specific performance of the settlement agreement, the Court noted that the right to a jury trial does not extend to cases that would have been tried to an equity court at the time the Oregon Constitution was adopted. After considering the three forms a settlement agreement may take – executory accord, accord and satisfaction, or a substituted contract – the Court found that the settlement agreement at issue was an executory accord since the defendants alleged that the plaintiff agreed to release its claims only after the defendants made the promised payment. The Court observed that executory accords were historically not cognizable at law. In response to the plaintiff’s alternative argument that the defendants’ affirmative defense required a jury trial, the Court noted that because the affirmative defense involved an executory accord, it too was an equitable claim not subject to a jury trial.

The Supreme Court affirmed the trial court’s finding that the parties had agreed to a settlement and remanded the case to the trial court for a determination of prejudgment interest.

Apparent authority supports warranty liability, Oregon Supreme Court holds

The Oregon Supreme Court today addressed the scope of an agent's apparent authority in a case involving failed stucco siding.  In Taylor v. Ramsay-Gerding Construction Co., a building owner expressed concerns during construction about the performance of the stucco exterior.  In response, the territory manager for the stucco system's manufacturer stated orally and in a letter that the manufacturer gave a five-year warranty.  Soon after construction was complete the stucco became discolored due to rust, and the owner sued on the manufacturer's warranty.  The manufacturer contended that its manager had neither express nor apparent authority to issue the warranty.

The Supreme Court held that, while the agent lacked express authority, there was sufficient evidence to find apparent authority.  First, the manufacturer created apparent authority by assigning the agent to visit building sites and work with customers to solve problems.  Further, the agent's letter agreeing to the warranty reasonably led the owner to believe that the agent had authority.  For these reasons, the Supreme Court held that the jury properly found in favor of the owner.

Oregon Court of Appeals applies doctrine of ratification to enforce contract

Last week, in Lemley v. Lemley, the Oregon Court of Appeals held that a settlement agreement to transfer an interest in real property is enforceable even though the agreement was executed by an attorney who lacked written authority to enter into the settlement on his client's behalf.

The case offers the karmic lesson that it is better to honor one's agreements than to seek relief through perceived legal loopholes.  The parties in Lemley conducted several years of contentious court battles following their divorce.  Before a round of appeals, the parties reached a settlement of their ongoing dispute over money and real property.  The defendant's attorney signed a letter setting out the settlement, and the plaintiff subsequently honored all of his obligations under the agreement.  When it came time for the defendant to transfer real property to the plaintiff, she balked and claimed she was not obligated to transfer the real property because her attorney was not authorized to enter into a settlement on her behalf.  The trial court sided with the defendant, as it reluctantly found she did not provide her attorney with written authority to settle.  As a result, according to the trial court, the attorney lacked actual or apparent agency to agree to the terms of the settlement.

The Court of Appeals did not address whether the attorney possessed authority under the law of agency to bind the defendant to the settlement agreement.  Instead, the court concluded the defendant ratified the settlement agreement because the evidence showed she knew about its material terms and knowingly accepted its benefits.  As a result of the ratification, the agreement was enforced as if the attorney had actual authority. 

Oregon Court of Appeals: Party who claims no contract existed can't recover attorney fees

Contracts often provide for an award of attorney fees to one of the parties in the event of litigation relating to the contract.  Under Oregon statutory law, a prevailing party in such a lawsuit is entitled to recover its attorney fees even if "the party prevails by reason of a claim or defense asserting that the contract is . . . void or unenforceable."  ORS 20.083. 

The Oregon Court of Appeals addressed last week whether this statute applies when the prevailing party convinces the court that the contract was never finalized.  In Dess Properties, LLC v. Sheridan Truck & Heavy Equipment, LLC, the parties negotiated a contract to sell real property.  Plaintiff later sued to enforce the contract, but defendant succeeded in arguing that the parties did not complete the deal.  Defendant sought to recover its attorney fees under ORS 20.083, claiming that a never-finalized contract is the same as a "void" contract.  The court refused to award fees, holding that the phrase "void contract" is a legal term of art meaning an agreement "actually entered into [but] unenforceable" due to failure to comply with some other legal requirement.  In this case, the contract was nonexistent rather than void, and the prevailing party was not entitled to recover fees.

Oregon Court of Appeals OKs contract claim despite delayed business registration

Under Oregon statutory law, at 648.135(1), a person operating under an assumed business name cannot file suit on behalf of that business unless the assumed name is registered with the state.  The Oregon Court of Appeals held last week that, even if a party lacked standing to sue because its business name was unregistered, its filing of a registration while the lawsuit is pending can cure the defect.

In Pacific Coast Recovery Service, Inc. v. Janice Jean Johnston, a collection agency appealed from a judgment of dismissal, arguing that the trial court erred in holding that the collection agency lacked standing to maintain an action for breach of contract.  The trial court had determined that, because the collection agency's assignor -- the business that had retained the agency to collect the debt -- had not registered its assumed business name under ORS 648.007 at the time the action was filed, the collection agency was precluded from pursuing its lawsuit. 

In reversing the trial court, the Court of Appeals held that, because the collection agency's assignor had registered by the time the trial court ruled on the motion to dismiss, the asserted lack of standing had been "cured" before the trial court granted the motion to dismiss.  The statutory "cure" will not, however, help plaintiffs where the statute of limitations has expired before registration of the assumed business name.  In those circumstances, according to the Court of Appeals, the action will be barred.

You've gotta pay to play, says the Washington Court of Appeals

In a sharply-worded opinion, the Washington Court of Appeals yesterday reiterated some bedrock principles governing contract formation.  In Granton v. State Lottery Commission, a pro se plaintiff claimed that he was prevented from purchasing what he believed would have been a winning lottery ticket for a "Mega Millions" drawing, due to a malfunctioning ticket distribution machine in a gas station convenience store.  He asserted that the "play slip" he handed to the clerk with his chosen lottery numbers matched the winning numbers later drawn; accordingly, despite the fact that the faulty machine prevented him from actually paying for and receiving an official lottery ticket, he sought the jackpot.

Not a chance, said the Court -- literally.  The Court noted that, because the ticket sale was frustrated, plaintiff did not have a valid ticket and was unable to provide the required consideration (the ticket price) necessary to accept the Lottery Commission's offer of a chance to win a prize.  Therefore, no contract was formed.  The plaintiff was lucky nonetheless:  the Court, in an exercise of merciful discretion, decided not to impose monetary sanctions on the plaintiff for having filed a frivolous lawsuit.

Ater Wynne scores trial court victory in commercial lease dispute

Last Friday, Ater Wynne trial lawyer Steve Blackhurst obtained a jury verdict in favor of telecommunications provider Verizon, following a two-week trial in Grants Pass.  At issue was the interpretation of a lease associated with Verizon's West Coast fiber optic system.  By a vote of 12-0, the jury denied the landlord's effort to terminate the lease.