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In a case arising from a copyright dispute over the autobiography of the Watergate player known as “Deep Throat,” a federal district court in the District of Columbia has issued a stay pending arbitration. The Court’s opinion includes dicta questioning whether the Federal Arbitration Act permits the arbitration-specific rule that California courts apply to employee arbitration agreements.
In de Toledano v. O’Connor, No. 06-1214, 2007 WL 2350111 (D.D.C. Aug. 17, 2007), de Toledano and Mark Felt, Sr., co-authored a biographical account of Felt, Sr.’s career as an FBI agent. Twenty-three years later, in early 2003, Felt, Sr.’s son, Mark Felt, Jr., contacted de Toledano about obtaining his copyright in the book. Initially, Felt, Jr., proposed a royalty payment structure, but the parties ultimately agreed that de Toledano would transfer his rights in the book in exchange for a guaranteed payment of $5,000 and an additional payment of $5,000 conditioned on the publication of another book.
When he didn’t receive any payment, de Toledano wrote O’Connor, the person negotiating on Felt, Jr.’s behalf, and asserted that he was canceling the deal. O’Connor eventually mailed payment. Several months later, O’Connor authored a Vanity Fair article revealing that Felt, Sr., was “Deep Throat,” the confidential informer who played a key role in the Watergate scandal.
A year later, Felt, Sr., filed an arbitration claim to resolve the dispute over de Toledano’s rights in the book. Upon learning of the arbitration, de Toledano sued Felt, Sr., Felt, Jr., and O’Connor for fraud and copyright infringement. In response, Felt, Sr., and O’Connor filed a motion to stay the court action pending arbitration. De Toledano opposed the motion on several grounds.
In ruling on the motion for a stay, the Court first addressed whether it had authority under Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) to resolve the issues raised by de Toledano in opposing arbitration. Under Buckeye, if a contract contains an arbitration clause, the arbitrator must resolve a challenge to the validity of the contract as a whole. However, footnote 1 of the Buckeye decision left open the question of who resolves a challenge to the existence of the contract.
The Court relied on footnote 1 of the Buckeye decision and precedent from outside circuits in holding that “a party [who] contests its assent to a contract containing an arbitration provision should not be required to submit to arbitration until the court determines than an agreement in fact existed.” Thus turning to that issue, the Court found that the parties entered into a valid contract despite their subsequent failure to reduce the contract to a formal writing.
Having determined the existence of a valid contract, the Court turned to the other arguments made by de Toledano in opposing arbitration. First, de Toledano argued that O’Connor fraudulently induced him into agreeing to arbitration by not disclosing the costs of arbitration. In rejecting this argument, the Court explained that nondisclosure of the costs of arbitration could not rise to the level of fraud because that information was available to de Toledano.
De Toledano also argued that the arbitration agreement was unconscionable under California law. The Court rejected the unconscionability argument because de Toledano submitted no evidence that the arbitration agreement was presented to him on take it or leave it basis.
Lastly, de Toledano argued that the arbitration agreement was unenforceable because arbitration would be cost-prohibitive. The Court examined this argument under both federal law and California law.
On the application of federal law, the Court found that de Toledano’s reliance on the per se rule enunciated in Cole v. Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997) was misplaced because that rule, if still valid, must be limited to the employment context in light of Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), which established the rule that the cost-feasibility of arbitration must be determined on a case-by-case basis.
According to the Court, under Green Tree, de Toledano had to demonstrate that the costs of arbitration would exceed the costs of litigation to such a degree that it would preclude him from vindicating his statutory rights in the arbitral forum. He failed to meet this burden because there was no estimate of the costs of litigation and thus no basis for comparison.
On the application of California law, the Court again found that de Toledano was relying on a per se rule that “has never been applied outside of the employer-employee context.” Accordingly, the Court rejected the argument that the arbitration agreement was unenforceable under Armendariz v. Foundation Health Psychcare Services, Inc., 6 P.3d 669 (Cal. 2000) and its progeny.
Having rejected de Toledano’s challenges to the arbitration agreement, the Court issued an order staying the action pending arbitration of the dispute between de Toledano and Felt, Sr. However, in issuing a stay with respect to O’Connor, the Court relied on its discretionary powers rather than the Federal Arbitration Act (FAA) based on circuit precedent holding that the FAA does not apply where a nonsignatory is attempting to enforce an arbitration agreement under the doctrine of equitable estoppel.
The Court’s ruling in this case sheds some light on Gentry v. Superior Court, 165 P.3d 556 (Cal. 2007), which was decided two weeks later. First, the Court’s analysis of Armendariz and its progeny, which now includes Gentry, clarifies that those cases have no application outside of the employment context.
Second, the Court’s decision highlights a defect in the preemption analysis in Gentry. Specifically, at footnote 9, the Court states: “Application of the Armendariz rule might also be inconsistent with the FAA, which preempts ‘state laws applicable only to arbitration provisions.’” Thus, as the Court indicated, the rule enunciated in Armendariz applies only to arbitration agreements.
Yet even though Armendariz created an arbitration-specific rule that is entirely separate from the doctrine of unconscionability, the California Supreme Court sidestepped the preemption question in Gentry by referring to its preemption analysis in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005) without acknowledging the distinct underpinnings of the two holdings – namely, that Gentry applied the arbitration-specific rule enunciated in Armendariz, while Discover Bank applied the doctrine of unconscionability.
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