Siegel v. Prudential Ins. Co. of America

• Citation: 67 Cal.App.4th 1270,79 Cal.Rptr.2d 726
• Decision Date: 20 November 1998
• Docket Number: No. B115350,B115350
• Court: California Court of Appeals
• Parties: , 14 IER Cases 961, 98 Cal. Daily Op. Serv. 8576, 98 Daily Journal D.A.R. 11,871 Howard SIEGEL, Plaintiff and Respondent, v. PRUDENTIAL INSURANCE COMPANY OF AMERICA et al., Defendants and Appellants.

Page 726

79 Cal.Rptr.2d 726

67 Cal.App.4th 1270, 14 IER Cases 961,

98 Cal. Daily Op. Serv. 8576,

98 Daily Journal D.A.R. 11,871

Howard SIEGEL, Plaintiff and Respondent, v. PRUDENTIAL INSURANCE COMPANY OF AMERICA et al., Defendants and Appellants.

No. B115350.

Court of Appeal, Second District, Division 5, California.

Nov. 20, 1998.

Certified for Partial Publication. ^*

Review Denied Feb. 24, 1999.

Morgan, Lewis & Bockius, Joseph E. Herman and John S. Battenfeld, Los Angeles, for Defendants and Appellants.

Ball and Yorke, Allen R. Ball and Esther R. Sorkin, Ventura, for Plaintiff and Respondent.

TURNER, P.J.

I. INTRODUCTION

Defendants, the Prudential Insurance Company of America (Prudential) and James Dinges, appeal from a judgment denying their petition to vacate an arbitration award. Additionally, they appeal from a judgment confirming the award in favor of plaintiff, Howard Siegel. Defendants argue that the manifest disregard for the law standard of review of the merits of an arbitration award must be applied to this case because California's rule, which prohibits such, is preempted by the provisions of 9 United States Code sections 10 and 12 ¹ of the United States Arbitration Act (USAA). In the published portion of this opinion, we reject defendants' contention that section 10 of the USAA preempts California's rule precluding judicial review of the merits of an arbitrator's ² award. We conclude the present effort to vacate the award is subject to judicial review pursuant to California's arbitration statute, Code of Civil Procedure section 1286.2.

II. BACKGROUND

On December 10, 1993, plaintiff filed a wrongful termination action against defendants in the superior court. The complaint alleged causes of action for: wrongful termination; breach of the implied contract of continued employment; breach of the implied covenant of good faith and fair dealing; defamation; breach of written contract; and negligent infliction of emotional distress. On March 4, 1994, the trial court granted defendants' petition to compel arbitration and stayed further judicial proceedings. The order was based on a written agreement between the parties that disputes arising from the plaintiff's employment with defendants would be subject to arbitration before the National Association of Securities Dealers, Inc. (NASD).

The arbitration hearing began on May 29, 1996, before three arbitrators, Jean Elliott, Jeffrey Skogsbergh, and Larry Edmonson, on claims for wrongful termination and defamation. On December 11, 1996, after eight days of hearings, the parties were informed that Mr. Skogsbergh had withdrawn from the panel and had been replaced by Andrew Sorenson. On January 3, 1997, defendants requested that the arbitration hearing begin again. After hearing arguments, the arbitrators determined the case would not be started over but would proceed with the new arbitrator. At least 12 additional hearing dates occurred with the new panel.

Viewing the record in a light most favorable to the judgment below, as we must (Gantt v. Sentry Insurance (1992) 1 Cal.4th 1083, 1087, 4 Cal.Rptr.2d 874, 824 P.2d 680; Agarwal v. Johnson (1979) 25 Cal.3d 932, 938, 160 Cal.Rptr. 141, 603 P.2d 58), the following facts were established at the arbitration. Plaintiff originally began working for Prudential in 1975 as an agent. He was promoted to sales manager before he was terminated in 1983. Prudential re-hired him as a sales manager in 1988. Plaintiff was supervised by Gary Budish, Mr. Dinges, and then James Novack. As previously noted, Mr. Dinges is a named defendant in the present litigation. During his employment as a sales manager, plaintiff received many citations and commendations.

In May 1990, Mr. Budish, who was then the district manager, conducted a class to teach managers and agents how to "churn" policies. "Churning" is a tactic to encourage policyholders to borrow against the cash value of existing policies in order to purchase newer and more expensive ones. The original policy eventually collapses under the loans taken against it. Then the policyholder is left with either a more expensive policy or no coverage at all. One of the employees taped a churning class taught by Mr. Budish. The taping, which occurred in a room full of agents and managers, occurred without Mr. Budish's consent.

In September 1990, Mr. Dinges sent an associate, John Martin, to tell plaintiff how to make more money in bonuses from investments in mutual funds. This would be accomplished by dividing the investment between many funds without the client's knowledge. This would deprive the client of volume discounts and cost him or her more money in sales charges. This practice would, however increase the money payable to the selling agent and bonuses due to management. Plaintiff spoke to Mr. Dinges about Mr. Martin's advice. Plaintiff stated he considered the plan unethical and that he would not allow his sales staff to participate in it.

In January 1991, plaintiff was promoted to district manager. Plaintiff's sales unit became one of the top producing units in the country. In March 1991, plaintiff reported the churning class to his supervisors, Mr. Dinges and Mr. Novack. However, Mr. Dinges praised agents for churning activities.

In April 1991, plaintiff submitted a request for reimbursement of airfare that was improper because it contained an incorrect amount. A meeting with Mr. Dinges, Mr. Novack, and plaintiff was held. After the meeting, plaintiff was placed on six months probation. However, in June 1991, Mr. Dinges unilaterally altered the probation to be open-ended. Karen Notarainni, a Prudential employee, testified that "open-ended probation" was for agents and specific probation terms for district managers were determined by the vice president of regional marketing.

Plaintiff presented evidence defendants: publicly praised one employee known, as the "doctor," for his ability to remove cash values from policies; promoted Mr. Budish to vice president; this promotion occurred after plaintiff reported that Mr. Budish forged a policyholder's signature to an order increasing coverage from one to two million dollars; determined the forgery was merely one "of convenience"; sponsored seminars on selling life insurance policies to elderly people by misleading them into believing that certain benefits could be used to finance long-term care, when, in fact, the benefits could only be used for short-term care; and used computer software to generate printouts containing inaccurate and misleading information which were shown to clients. These practices led plaintiff to complain to his supervisors. In the spring of 1992, after reporting violations to Mr. Novack, plaintiff's office was audited due to alleged irregularities in monies advanced to agents. The audit found that plaintiff's "office systems of internal controls are satisfactory to maintain processing integrity[ ][a]nd the office is in general compliance with company procedures." Plaintiff was discharged in September 17, 1993, four days after making a report to the ethics hotline.

On May 13, 1997, the arbitrators issued their decision. They unanimously determined that defendants were jointly and severally liable to plaintiff for $113,016 in actual damages and for $225,000 in general damages. The arbitrators also determined Prudential was liable to plaintiff for $1,000,000 in punitive damages for acting with oppression, fraud, and malice in discharging plaintiff for reporting wrongdoing by its employees.

On June 13, 1997, plaintiff filed a petition to confirm the arbitration award. Defendants opposed the petition to confirm the award. Defendants filed a petition to vacate the award. Defendants sought to vacate the award on the grounds: (1) the arbitrators exceeded their authority because only two of the three arbitrators who decided the case heard all the evidence presented by the parties; (2) the arbitrators disregarded the law and violated public policy by allowing a tape recording into evidence which was secretly recorded in violation of Penal Code section 632; (3) the arbitrators acted in "manifest disregard of the law" by awarding emotional distress damages without evidence that plaintiff suffered severe mental injury; and (4) the arbitrators acted in "manifest disregard of [the] law" by awarding $1,000,000 in punitive damages without any evidence to support such an award.

The trial court held a hearing on July 18, 1997. The trial court initially indicated that it intended to deny plaintiff's petition to confirm the award. Further, the trial court indicated a tentative intent to grant defendants' petition to vacate the award. Eventually though, the trial court granted the petition to confirm the arbitration award. Also, the trial court denied the petition to vacate the award. Defendants filed a timely notice of appeal from the judgment.

III. DISCUSSION

A. Overview of the Grounds for Vacating an Arbitration Award

The arbitration clause contained in the agreement between plaintiff and Prudential involves "commerce" and is governed by the USAA. (Gilmer v. Interstate/Johnson Lane Corp. (1991) 500 U.S. 20, 24-25, 111 S.Ct. 1647, 114 L.Ed.2d 26; Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 405, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) As will be noted in greater depth later, the purpose and effect of the USAA is to encourage the arbitration of civil disputes outside the judicial forum. (Moses H. Cone Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765; Rosenthal v. Great Western Fin. Securities Corp., supra, 14 Cal.4th at p. 405, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) The USAA is predicated on Congress's authority to enact substantive rules under the Commerce Clause. (Allied-Bruce Terminix Cos. v. Dobson (1995) 513 U.S. 265, 271, 115 S.Ct. 834, 130 L.Ed.2d 753; Perry v. Thomas (1987) 482 U.S. 483, 489, 107 S.Ct. 2520, 96 L.Ed.2d 426; Southland Corp....