Res Judicata — Respondent’s Failure to Assert in Arbitration His Defense that the Contract Was Procured by Fraud Precludes Later Lawsuit on that Ground — All Arbitrable Issues Must Be Submitted to Arbitration

 

Clinton v. Hendricks & Lewis PLLC, 2014 U.S. App. LEXIS 3131 (9th Cir. Feb. 20, 2014):

Plaintiff-Appellant George Clinton appeals district court orders (1) granting Hendricks & Lewis's ("H&L") Federal Rule of Civil Procedure 12(b)(6) motion to dismiss Clinton's fraudulent inducement and negligent misrepresentation claims, and (2) granting H&L's motion for summary judgment on Clinton's legal malpractice and declaratory relief claims.

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In May 2005, Clinton retained H&L to represent him in civil litigation to recover ownership rights in some of his music recordings. The parties executed a written contract that included an arbitration clause that read in part, "if any dispute should arise between you and us regarding the amount of the fees or costs due to us under the terms of this agreement, the exclusive means of resolving the dispute shall be by submission to binding arbitration." Clinton did not pay his bills, and H&L terminated the relationship in August 2008.

In subsequent arbitration proceedings, H&L sought more than $1.5 million in unpaid legal fees. Clinton failed to assert affirmative defenses or counterclaims during arbitration, and he elected not to attend the arbitration hearing, which resulted in an award to H&L of nearly $1.7 million. United States District Judge John Coughenour confirmed the arbitration award in May 2010.

Later, Clinton sought (1) a declaration that only fee-related disputes were subject to arbitration, and (2) more than $10 million in damages for legal malpractice and professional negligence (together "legal malpractice"), as well as fraudulent inducement and negligent misrepresentation.

The district court dismissed Clinton's fraudulent inducement and negligent misrepresentation claims on the theory that they were barred by res judicata. The district court also granted summary judgment to H&L on Clinton's legal malpractice claim, reasoning that California law--and its one-year statute of limitations--applied to bar Clinton's claim. See Cal. Civ. Proc. Code § 340.6. Finally, the district court denied as moot Clinton's request for a declaration regarding the scope of the arbitration agreement. This appeal followed.

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Because Clinton's fraudulent inducement and negligent misrepresentation claims challenge the validity of the underlying retainer agreement--rather than the validity of the arbitration clause itself--they were arbitrable. See, e.g., Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 449 (2006) ("[A] challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator."); ATSA of Cal., Inc. v. Cont'l Ins. Co., 702 F.2d 172, 175 (9th Cir. 1983) ("[W]hen  parties agree to submit disputes to arbitration, it is presumed that the arbitrator will be authorized to determine all issues of law and fact necessary to resolve the dispute."), amended by 754 F.2d 1394 (9th Cir. 1985). Because arbitration decisions have preclusive effect, see Clark v. Bear Stearns & Co., 966 F.2d 1318, 1321 (9th Cir. 1992), Clinton's failure to raise those claims at arbitration bars him from raising them here, see Allen v. McCurry, 449 U.S. 90, 94 (1980) (holding that under res judicata, parties may not "relitigat[e] issues that were or could have been raised" in a prior action (emphasis added)). As the district court properly concluded, the arbitration award "necessarily presumed the validity and enforceability" of the retainer agreement--an agreement that Clinton may not now collaterally attack.

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