Sargon Enterprises, Inc. v. Browne George Ross LLP, No. B271718 (Cal. Ct. App. Sept. 26, 2017) [click for opinion]

In 1996, Plaintiff-Appellant Sargon Enterprises Inc. ("Sargon") contracted with the University of California ("USC") to conduct a five-year clinical study of a dental implant that Sargon had developed and patented. In 1999, Sargon sued USC for breach of contract. The trial court barred evidence of Sargon's lost profits, finding that USC could not have reasonably anticipated them. A jury found that USC had breached the contract and awarded Sargon $433,000 in damages. The Court of Appeal reversed, finding that the trial court had erred in precluding evidence of Sargon's lost profits, and ordered a new trial.

In 2005, Sargon retained Browne, Woods & George LLP ("BWG," now known as Defendant-Respondent Browne George Ross LLP ("BGR")) as counsel for the second trial. BWG's retainer stated that "any and all disputes, claims, or proceedings between you and BWG arising out of or relating to any work or services performed by BWG . . . shall be settled by a single arbitrator from JAMS."

After an eight-day evidentiary hearing, the trial court excluded as speculative the proffered expert testimony of Sargon's damages expert. The parties thereafter stipulated to entry of a $433,000 judgment in favor of Sargon on its breach of contract claim. USC then filed an interpleader action against Sargon, BGR and other law firms to resolve attorneys' fees disputes relating to the claim.

Sargon asked BGR to represent it in the interpleader action. BGR advised Sargon of a potential conflict of interest, ultimately leading Sargon to sign a release, which stated that "other than rights and responsibilities specifically set forth in the [September 2005 retainer agreement] . . . there are no additional rights, claims, obligations, liabilities or responsibilities (whether past or present) between you and my firm" and "each party . . . hereby releases and absolutely forever discharges the other(s) of and from any and all claims."

In 2011, the Court of Appeal reversed the judgment entered after the second trial on the ground that Sargon's expert's testimony should have been admitted. The Supreme Court granted review and reversed the decision, effectively affirming the $433,000 stipulated judgment. In 2014, Sargon filed a legal malpractice claim against BGR, alleging that BGR had failed to advise Sargon that entry into the stipulated judgment could preclude an appeal of the order barring its lost profits expert.

BGR responded by filing a demand for arbitration with JAMS pursuant to the arbitration clause in the 2005 retainer agreement with Sargon. BGR asserted two claims: (1) for damages resulting from Sargon's breach of the retainer agreement by filing a legal malpractice action in superior court; and (2) for a declaratory judgment that it had not committed legal malpractice. BGR also filed a petition to compel arbitration of Sargon's pending superior court action for legal malpractice. Sargon opposed the petition on the grounds that it had agreed to arbitrate disputes with BWG, not BGR. The superior court disagreed, finding a valid binding arbitration clause existed between Sargon and BWG, now known as BGR, and granted the petition to compel arbitration.

In the ensuing arbitration, the arbitrator rejected Sargon's malpractice claim. The arbitrator held that Sargon's execution of the release had discharged all then-existing claims against BGR. The arbitrator also held that Sargon had breached BGR's retainer agreement by filing a malpractice action in superior court, in conflict with the arbitration clause. The arbitrator awarded BGR $200,000 in damages, which the superior court confirmed. Sargon appealed.

On appeal, the court considered whether the California Arbitration Act (the "Act") embodies a legislative intent that arbitrability issues be resolved by trial courts. If so, the court would also consider whether the arbitrator's award—finding that Sargon had breached the arbitration agreement contained in BGR's retainer by filing a legal malpractice action in superior court—exceeded the arbitrator's powers by violating Sargon's statutory rights or an explicit legislative expression of public policy.

The court noted that the Act specifically includes procedures for enforcing arbitration agreements when allegedly arbitrable claims are brought in court. Parties may respond to such a lawsuit by filing an answer or, alternatively, petitioning the court to compel arbitration. While the Act requires California courts to order arbitration where a valid arbitration agreement governs the controversy, it protects litigants' rights to test the validity of arbitration agreements in court. The Act also explicitly provides that a party may challenge the enforceability of an arbitration agreement in court without forfeiting the right to arbitrate should the challenge be unsuccessful.

For these reasons, the court concluded that the arbitrator had exceeded his powers in finding that Sargon had breached the 2005 BGR retainer by filing a superior court action. The Act required Sargon to submit to arbitration, if so ordered, but also specifically preserved Sargon's right to seek judicial review of the arbitration clause. The arbitrator's entry of the award deprived Sargon of its right to test the arbitration agreement in court, and the superior court's approval of the award—and sanctioning of a $200,000 judgment against Sargon for filing its malpractice case—was a legal error. The court vacated the part of the award granting BGR's breach of contract claim but left intact the portion denying Sargon's malpractice claim.