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Heimlich v. Shivji

California Court of Appeals, Sixth District

May 31, 2017

ALAN HEIMLICH, Plaintiff and Respondent,
SHIRAZ M. SHIVJI, Defendant and Appellant.

         Santa Clara County Superior Court Superior Court No. 112CV231939 The Honorable William J. Elfving

          Attorneys for Appellant Shiraz M. Shivji: Ellahie & Farooqui Javed I. Ellahie Omair Farooqui

          Attorneys for Respondent Alan Heimlich: Law Offices of Nicholas D. Heimlich Nicholas D. Heimlich

          WALSH, J. [*]

         I. introduction

         The issue presented by this appeal is the recoverability of costs available under Code of Civil Procedure section 998 following an American Arbitration Association (“AAA”) award that denied requests by both sides for damages, costs, and attorney fees.[1]

         Attorney Alan Heimlich (Attorney) filed this action seeking payment of unpaid fees from his client Shiraz M. Shivji (Client). Client filed an answer and, one year later, asked for arbitration pursuant to his retainer agreement with Attorney. The trial court compelled contractual arbitration that resulted in no recovery by either side. Six days after the arbitration award, Client asked the arbitrator to award him costs under section 998 because Attorney's recovery was less favorable than a section 998 offer that Client made two months before demanding arbitration. When the arbitrator responded that he no longer had jurisdiction to take further action, Client asked the trial court to confirm the arbitration award and to award him section 998 costs as well. The court confirmed the arbitration award but, relying on Maaso v. Signer (2012) 203 Cal.App.4th 362 (Maaso), determined that Client failed to make a timely section 998 claim to the arbitrator and denied Client's request for section 998 costs. Client has appealed from this order after judgment.

         We reject Attorney's suggestion that Client should have presented his section 998 request for costs to an arbitrator before the arbitration award was rendered, because an offer which is not accepted “cannot be given in evidence upon the trialor arbitration.” (§ 998, subd. (b)(2).) Further, we find that in the course of his request to confirm the arbitration award Client established that the arbitrator had refused to hear any evidence of Attorney's rejection of Client's section 998 offer. Thus, we conclude that Client timely presented his section 998 claim to the arbitrator, the arbitrator should have reached the merits of that claim, and the arbitrator's refusal to hear evidence of the section 998 offer warranted partially vacating the arbitration award.

         Therefore, we will reverse the order confirming the arbitration award and direct that an order be entered partially vacating the arbitration award to allow a determination of the section 998 request by the arbitrator or, if that avenue is not availing, by the court.

         II. evidence on motion

         A. the arbitration agreement

         In August 2003, Client retained Attorney to protect Client's intellectual property. The retainer agreement included the following arbitration provision.

         “8. Arbitration. The client and our firm agree that all disputes or claims of any nature whatsoever, including but not limited to those relating to our fees or the adequacy or appropriateness of our services, shall be resolved by private and final binding arbitration before either JAMS or the American Arbitration Association in San Francisco, California in accordance with their rules -- the client may choose one of these two providers. The arbitrator must decide all disputes in accordance with California law and shall have power to decide all matters, including arbitrability....” (Capitalization omitted.)

         B. commencement of this lawsuit

         For a number of years after being retained, Attorney assisted Client with filing patent applications and forming a corporation, Giotti, Inc., to hold the patents. A dispute arose over Attorney's fees. Notwithstanding the above arbitration provision, Attorney filed a form complaint in the Santa Clara County Superior Court on September 10, 2012 seeking recovery for unpaid invoices.[2] The complaint alleged a breach of contract and a common count for services rendered and an open book account. Attorney prayed for damages of $125, 244.59, interest on the damages, and costs of suit, but not attorney fees. Client filed a form answer to the complaint that alleged 21 affirmative defenses. Client prayed for costs of suit and reasonable attorney fees, despite the fact that the retainer agreement did not provide for the prevailing party in any dispute to recover attorney fees or costs.[3]

         On September 18, 2013, Client sent Attorney an offer to compromise the action by allowing a judgment providing that Client pay “the amount of thirty thousand and one ($30, 001.00) dollars, including all taxable costs of suit to date of acceptance, ” with each party to bear its own attorney fees and costs.

         On November 1, 2013, the trial court denied Client's motion for summary judgment. On November 14, 2013, the court denied Attorney's motion for judgment on the pleadings, except as to affirmative defenses 7 through 12, 14, 17, 18, 20, and 21. The trial court also vacated a December 2013 trial date. On January 31, 2014, Attorney filed a first amended complaint that added two causes of action for fraud and another for declaratory relief.

         C. the arbitration proceedings

         One year after Client filed his answer, on November 18, 2013, he demanded arbitration of the dispute on an AAA form entitled “Commercial Arbitration Rules.”[4] Attorney objected to Client's demand.

         On April 4, 2014, in response to Attorney's objection, an AAA arbitrator decided that it was up to the trial court to determine whether Client had waived arbitration by participating in this action. On May 29, 2014, the trial court granted Client's motion to compel arbitration and stay this action pending arbitration.

         In the arbitration proceedings, Client filed a 21-page statement of claims. Client alleged that Attorney had achieved approval of only one of Client's 108 patent claims. Client paid Attorney $16, 867.78 between September 3, 2003 and August 27, 2004. In September 2005, Client incorporated Giotti and, between November 26, 2005 and May 22, 2009, Giotti paid Attorney $159, 697.44 for his services. Client accused Attorney of unauthorized flat fee billing, double billing, unilateral fee increases, delayed billing, and inflated billing. Client alleged breaches of contract, fiduciary duty, and the duty of good faith and fair dealing, and also alleged unlawful business practices. Client requested restitution for unjust enrichment, a refund of amounts paid, punitive damages, and “all costs of suit incurred herein.” There is no indication that Client specifically claimed entitlement to costs under section 998 either in his statement of claims or any other pleading preceding the arbitrator's decision.

         Attorney filed an 18-page “Counterclaim” in arbitration that restated the five causes of action in his amended civil complaint and added claims for indemnification and comparative fault. Attorney sought to recover for unpaid invoices, attorney fees, “Costs of this Arbitration and the Lawsuit in Santa Clara County... per Civil Code Section 3300, and [Attorney's] costs of the lawsuit and this arbitration per California Code of Civil Procedure Section 1032.”

         After hearing six days of evidence, the AAA arbitrator issued an eight-page decision on March 5, 2015. The award was titled as from a “Commercial Arbitration Tribunal.” The arbitrator determined that Attorney helped Client form a corporation, Giotti, Inc., to which Client transferred his interest in four patents. After late November 2005, an attorney-client relationship was created between Attorney and Giotti. Attorney was awarded nothing on his counterclaims against Client because “[t]he legal services provided by [Attorney] from late November, 2005 through May, 2007 were performed for the benefit of Giotti, Inc. and the obligation to pay for those services rested with Giotti, Inc., ” which Attorney had not named as a party in his complaint or his counterclaim.

         The arbitrator awarded Client $0 on his claims against Attorney. As to arbitration expenses, “[t]he administrative fees and expenses of the [AAA] totaling $9, 575.00 shall be borne as incurred and the arbitration compensation totaling $22, 800.00 shall be borne as incurred. Each side will bear their own attorneys' fees and costs.” (Capitalization omitted.) As to prearbitration expenses, the arbitrator ruled that, while Attorney had breached the arbitration agreement by filing this lawsuit, Client could have remedied the breach by raising the issue immediately. “Accordingly, both parties are at fault for any expenses incurred in that litigation.” The award also stated, “This Award is intended to be a complete disposition of all claims and counterclaims submitted to this Arbitration. All claims not expressly granted herein are hereby[] denied.”

         Six days after the award, on March 11, 2015, Client sent an e-mail to the arbitrator stating in part, “There is one open matter that has to do with the award of costs pursuant to CCP § 998 and the procedure to follow regarding the same.” “Our understanding is that the demand for an award for recovery of these costs should be submitted to the Arbitrator rather than directly to the Court. Your confirmation of this procedure will be appreciated.”

         The arbitrator responded by e-mail the following day. “Counsel, once I issued [m]y Final Award I no longer have jurisdiction to take any further action in this matter. As discussed in the Award, whatever may have been the costs, fees, etc. associated with the Santa Clara litigation were to be borne by the parties....”

         D. motion seeking costs and confirmation of award

         On April 24, 2015, Client filed a motion asking the court to resume jurisdiction in the case, confirm the arbitration award, and “Grant Interest and Costs Pursuant to CCP §998.” Client's motion explained that the arbitrator had rejected his request to award costs under section 998 due to a lack of jurisdiction. Client submitted a memorandum of costs totaling $76, 684.02, which included witness fees of $26, 668.01, AAA fees of $23, 550.00, and deposition costs of $11, 485.82.[5] Attorney opposed this request and moved to strike or tax costs. Client filed a reply.

         By order dated May 27, 2015, the court confirmed the arbitration award, “notwithstanding consideration of any motions pursuant to California Code of Civil Procedure § 998.”

         At a hearing on costs on June 16, 2015, the court's tentative ruling was: “I came to the conclusion that the leading case cited by plaintiff was on point and the one that the Court should follow, [is the] Maaso vs Signer case, 203 Cal.App.4th, 362. Basically, when the matter went to the arbitrator, it was [i]ncumbent upon the defendant to raise the CCP 998 issue with the arbitrator on a timely basis. In the view of the arbitrator, it got raised late after the award.” The court took the matter under submission and later the same day denied the remainder of Client's motion, granted Attorney's motion to tax costs, and ordered each party to bear their own costs and attorney fees as ordered by the arbitrator.

         III. awarding costs under section 998 after arbitration

         A. applicable statutory schemes

         Three statutory schemes, all in the Code of Civil Procedure, are relevant to our analysis of the recoverability of costs in judicial proceedings to confirm, correct, or vacate arbitration awards. One is the general scheme authorizing recovery of costs of litigation beginning with section 1021. Another is California's Arbitration Act (“CAA”) which begins at section 1280. The third is section 998.

         Chapter 6 of Title 14 of Part 2 of the Code of Civil Procedure governs the recovery of costs of litigation. Section 1032, subdivision (b) sets forth the general rule that the party prevailing “in any action or proceeding” “is entitled as a matter of right to recover costs....” Section 1032, subdivision (a) identifies which party has prevailed in four sets of circumstances and otherwise leaves the determination of the prevailing party to the trial court's discretion. (deSaulles v. Community Hosp. of Monterey Peninsula (2016) 62 Cal.4th 1140, 1147.) Section 1033.5 was enacted in 1986 to codify in one place existing law concerning which costs are allowable. (Davis v. KGO-T.V., Inc. (1998) 17 Cal.4th 436, 441, disapproved on another ground by Williams v. Chino Valley Independent Fire Dist. (2015) 61 Cal.4th 97, 107.) It is worth noting that section 1033.5, subdivision (a)(10) currently includes as allowable costs “Attorney's fees, when authorized by...: [¶] (A) Contract. [¶] (B) Statute. [¶] (C) Law, ” as many published cases about arbitration costs involve attorney fees.[6]

         Section 998 is understood to be an exception to section 1032. Subdivision (a) of section 998 states, “The costs allowed under Sections 1031 and 1032 shall be withheld or augmented as provided in this section.” Scott Co. of California v. Blount, Inc. (1999) 20 Cal.4th 1103 (Scott Co.) explained: “Section 998 modifies the general rule of section 1032 that only the prevailing party recovers its costs.” (Scott Co., at p. 1112.) “It is the very essence of section 998 that, to encourage both the making and the acceptance of reasonable settlement offers, a losing defendant whose settlement offer exceeds the judgment is treated for purposes of postoffer costs as if it were the prevailing party.” (Scott Co., at p. 1114.) The purpose of section 998 “ ‘is to encourage settlement by providing a strong financial disincentive to a party-whether it be a plaintiff or a defendant - who fails to achieve a better result than that party could have achieved by accepting his or her opponent's settlement offer. (This is the stick. The carrot is that by awarding costs to the putative settler the statute provides a financial incentive to make reasonable settlement offers.)' ” (Scott Co., at p. 1116; Pilimai v. Famers Ins. Exchange Co. (2006) 39 Cal.4th 133, 139 (Pilimai).)

         In 1997, section 998 was amended to authorize arbitrators as well as courts to impose costs on parties whose arbitration awards were no more favorable than settlement offers they had rejected.[7] These amendments superseded the holding in Woodard v. Southern Cal. Permanente Medical Group (1985) 171 Cal.App.3d 656 (Woodard) “that section 998 and Civil Code section 3291 do not apply to [contractual] arbitration.” (Id. at p. 666.)

         Section 1293.2, part of the CAA, specifically makes the cost award provisions of sections 1032 and 1033.5 applicable in judicial proceedings to compel contractual arbitration and to confirm, correct, or vacate contractual arbitration awards. Section 1293.2 states, “The court shall award costs upon any judicial proceeding under this title as provided in Chapter 6 (commencing with Section 1021) of Title 14 of Part 2 of this code.” Section 1293.2 has been the basis for awarding litigation costs to parties who ...

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