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Court of Appeal:
Lawyers Waived Contractual Right to Arbitrate Under Agreement Due to Active Litigation
Opinion Says Plaintiffs Cannot Successfully Move to Compel, in Litigation Between Attorneys, After Having Requested Provisional Relief, Propounded Discovery, Demanded Jury Trial
By a MetNews Staff Writer
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Div. Five of this district’s Court of Appeal held Friday that an attorney and associated law firms have waived their contractual right to arbitrate claims against them by having actively pursued litigation against the defendants in court—requesting a temporary restraining order and preliminary injunction, propounding discovery, and indicating a demand for a jury trial—and only filing the request after a cross-complaint was filed against them.
In an opinion authored by Presiding Justice Brian M. Hoffstadt, and joined by Carl H. Moor and Dorothy C. Kim, the court tackled the question of what counts as a waiver of a contractual right to arbitrate under the California Arbitration Act after last year’s California Supreme Court case of Quach v. California Commerce Club Inc.
The high court in Quach overruled an arbitration-specific, judicially created rule requiring a finding of prejudice and held that ordinary contract principles apply to determine whether a waiver occurs under the act, such that a party must be found, by clear and convincing evidence, to have “intentionally relinquished or abandoned” a known right.
Applying Quach, Hoffstadt said:
“Here…we conclude there was waiver by a party who waited six months to move to compel arbitration—using the interim months to seek provisional relief, to propound discovery, to indicate in its case management statement a desire for a jury trial as well as arbitration, and to post jury fees.”
Soured Relationship
The question of waiver arose after a relationship between two attorneys soured. Stephen Hofer is the founder and president of the Los Angeles-based firm Aerlex Law Group (referred to in the opinion as “the Group”), which specializes in aviation law.
In 2008, he hired Vicky Boladian as a part-time contract attorney. In 2013, Hofer and Boladian formed Aerlex Tax Services LLC, which was created to provide tax-related services to the group’s clients and “others within the aviation industry.”
Boladian had a 45 percent equity interest in the tax company.
After a falling out, Hofer and Boladian executed a settlement agreement in 2020, vesting the sole decision-making power in the day-to-day operation of the tax firm in Boladian and agreeing to arbitrate any dispute relating to the contract.
They followed up with two other contracts amending provisions relating to the operating agreement of the limited liability company, again agreeing to arbitrate any disputes.
At Boladian’s request, in August 2023, the parties dissolved the tax company and shifted its assets to Aerlex Tax Services LLP. They retained the same ownership split in the newly formed partnership.
Two weeks later, Boladian formed the Boladian Aviation Law Group APC (“BALG”). She then withdrew from the partnership and allegedly removed what she represented to be 45% of the physical office furniture and retained nearly all of the Aerlex Tax Services LLP’s clients.
Hofer and Boladian dispute whether their professional relationship became a romantic one between 2011 and 2017.
Complaint Filed
On October 16, 2023, Hofer, Aerlex Law Group, Aerlex Tax Services LLC, and Aerlex Tax Services LLP filed a complaint against Boladian and BALG, asserting causes of action for breach of contract, breach of fiduciary duty, conversion, intentional interference, and various other claims.
Six months into the litigation—after the plaintiffs unsuccessfully moved for a temporary restraining order and a preliminary injunction, propounded a total of 734 discovery requests, and demanded a jury trial after mentioning the possibility of arbitrating the dispute during a case management conference—the defendants filed a cross-complaint, asserting contractual indemnity, breach of contract, and other causes of action.
Three days later, on April 26, 2024, the plaintiffs moved to compel arbitration, invoking the clauses in the three 2020 agreements. Los Angeles Superior Court Judge Michael E. Whitaker denied the motion on June 21, applying the legal framework from jurisprudence applicable before the high court decided Quach in July.
Friday’s opinion affirmed the order.
Waiver of Right
Hoffstadt wrote:
“Because Quach applies retroactively to this direct appeal…, and because we may affirm a trial court’s ruling on any correct ground…, we will follow the protocol set forth in Quach itself by ‘reviewing de novo the undisputed record of the trial court proceedings and asking whether’ a finding of waiver is warranted under Quach’s newly articulated test.”
Applying that framework, he said that “[t]here is no dispute that the Hofer plaintiffs knew of the contractual right to seek arbitration of the parties’ dispute” and declared:
“We independently conclude that Boladian and BALG established by clear and convincing evidence that the Hofer plaintiffs waived their right to compel arbitration.”
He continued:
“The Hofer plaintiffs waited six months after filing suit to move to compel arbitration and waited nearly five months after filing suit to raise the possibility of arbitration to the trial court in their case management statement, all the while litigating the case vigorously in the trial court. What is more, they provided the trial court no credible explanation for this delay. Unexplained delay in seeking arbitration, while proceeding with litigation in court without mentioning or seeking to preserve the right to arbitrate, constitutes powerful evidence of the relinquishment and abandonment of the right to arbitrate….”
Totality of Conduct
Hofer and the other plaintiffs argue that much of their litigation conduct, such as the filing of a complaint and propounding discovery, is not sufficient by itself to constitute waiver under applicable law. Unpersuaded, Hoffstadt remarked:
“[W]e reject the Hofer plaintiffs’ assumption that we should take a divide-and-conquer approach by examining whether each aspect of their litigation conduct by itself demonstrates a waiver; the inquiry into whether it is ‘highly probable’ the party has, by their conduct, intentionally relinquished or abandoned the right to arbitrate takes into account the totality of that conduct.”
Continuing, the presiding justice commented:
“The Hofer plaintiffs also assert they needed to file a lawsuit because they were unsure whether BALG, as a non-signatory to all three contracts, could be compelled to arbitrate. We also reject this assertion. The Hofer plaintiffs could have promptly moved for arbitration against only Boladian or against both defendants and obtained a ruling from the court about whether BALG was bound by the three agreements….Instead, the Hofer plaintiffs sued Boladian and BALG, and litigated against both for six months before moving to compel arbitration.”
Rejecting the plaintiffs’ argument that they needed to file a lawsuit because only a court could issue the provisional relief they sought, he said:
“Although [Code of Civil Procedure] section 1281.8 does specify that ‘appl[ying] for a provisional remedy’ such as a TRO or preliminary injunction in court ‘shall not operate to waive any right of arbitration,’ the statute conditions such non-waiver upon the applicant simultaneously ‘present[ing] to the court an application that all other proceedings in the action be stayed pending…arbitration.’ ”
The case is Hofer v. Boladian, B339542.
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