According to a California appellate court, a California court abused its statutory discretion to independently award attorney fees to a "prevailing" party in arbitration when the arbitrator explicitly found that no party prevailed in the matter and when the only other basis for the court's award was the opposing party's voluntary dismissal of the arbitration demand.

In Velasquez v. Khushf, No. A114773, 2007 WL 3409394 (Cal. Ct. App. Nov. 16, 2007), a dispute arose between the parties, and Khushf obtained a court order compelling arbitration. After limited discovery, Khushf voluntarily withdrew her arbitration claim. In response, Velasquez requested that the arbitrator award her attorney fees, which the arbitrator denied, finding that the merits of the dispute had not been heard and no party had prevailed. According to the arbitrator, the lack of a prevailing party precluded any award of attorney fees.

Velasquez then petitioned the trial court for attorney fees. Velasquez argued that Khushf's voluntary withdrawal in arbitration entitled her to attorney fees in the judicial forum. The trial court awarded attorney fees to Velasquez as the prevailing party.

On appeal, the Court reversed the attorney fee award because it was troubled that Velasquez relied on dismissal of the arbitration as evidence that she was the prevailing party in the matter, but did not disclose the arbitrator's specific finding that no party had prevailed. While the trial court did have the independent power to determine the prevailing party and award attorney fees, the Court stated that using the dismissal of the arbitration as the factual and legal basis for the award was an abuse of the trial court's discretion.

The Court found Velasqeuz's "procedural maneuver was the functional equivalent of the 'heads I win, tails you lose' proposition that has troubled [the courts] in one-sided de novo attacks on arbitration awards."

Furthermore, the Court found the trial court abused its discretion even if the arbitrator had not made an explicit finding on the prevailing party issue. First, the award was not permissible under Cal. Civ. Code § 1717(b)(2), which states that there is no prevailing party on contract claims when an action is voluntarily dismissed. Second, the award was not permissible under the alternative definition of a prevailing party contained in Cal. Code Civ. P. § 1032(a)(4), since that provision requires that a defendant party has a dismissal "entered" in his or her favor.

Since Khushf's dismissal of the arbitration claim was voluntary, the trial court could not award attorney fees to Velasquez under either definition.