Riley v. Quantumscape Corp.

Background

After QuantumScape terminated Riley’s employment, Riley began arbitration seeking shares or the value of shares that he claimed he was denied. The arbitrator construed Riley’s claims as breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud in the inducement. The arbitrator sustained QuantumScape’s demurrer without leave to amend as to the breach-of-contract claim and allowed Riley to amend the other two claims.

After a hearing, the arbitrator issued a partial final award and later a final award. The final award concluded that Riley had not proved his claims and that QuantumScape was entitled to fees and costs. The arbitrator deducted $155,370 for certain work by QuantumScape attorney Matthew Gorman and added $20,000 for fees incurred in pursuing fees.

Riley petitioned the district court to vacate the final award. He argued that the arbitrator showed evident partiality, engaged in misconduct that deprived him of a fundamentally fair hearing, and manifestly disregarded the law. QuantumScape cross-moved to confirm the award.

Federal Arbitration Act

The court held that the Federal Arbitration Act, rather than the California Arbitration Act, supplied the standard for reviewing the award. Although one agreement referred to California law and the California Code of Civil Procedure, the court concluded that this language did not clearly incorporate California arbitration rules. The other agreement expressly preserved the Federal Arbitration Act’s application. The court also noted that the arbitration materials repeatedly stated that the Federal Arbitration Act applied and that Riley did not contend he had objected to that application during the arbitration.

Under the Federal Arbitration Act, review of an arbitration award is limited and highly deferential. The party seeking to vacate the award bears the burden of establishing one of the statutory grounds for vacatur.

Evident Partiality and Misconduct

The court rejected Riley’s arguments that the arbitrator was evidently partial. The arguments concerned the arbitrator’s approval of Gorman’s out-of-state attorney application, QuantumScape’s attempted submission of invoices for private review, the fee award, and the alleged failure to provide a complete record of communications.

The court described the handling of Gorman’s application as sloppy but found no reasonable basis to conclude that the arbitrator was biased in favor of QuantumScape. The court also found that the arbitrator did not review the invoices submitted for private review and instructed that communications and submissions be shared through the arbitration system. Riley did not identify facts showing improper motives, and disagreement with the arbitrator’s rulings was not enough to establish bias.

The court separately rejected Riley’s misconduct argument. Riley offered only conclusory assertions and did not develop a specific argument showing that the arbitration process was fundamentally unfair.

Alleged Disregard of the Law

The court also rejected Riley’s claim that the arbitrator manifestly disregarded the law. That standard requires more than a legal or factual mistake: Riley had to show that the arbitrator understood and correctly stated clearly applicable law but intentionally disregarded it.

The court held that Riley had not met that standard regarding the consideration supporting the Separation Agreement, QuantumScape’s obligations under the implied covenant of good faith and fair dealing, fees for out-of-state attorneys, or the fee-shifting provisions. The court explained that it could not reweigh the evidence or reconsider the arbitrator’s contract interpretation. It did not reach Riley’s separate argument concerning substantive unconscionability because Riley had not shown that the fee-shifting provision was procedurally unconscionable.

Disposition

The court denied Riley’s petition to vacate and granted QuantumScape’s cross-motion to confirm the arbitration award. It held that QuantumScape was entitled to post-award prejudgment interest at an annual rate of 7% under California law. The judgment stated that QuantumScape was entitled to $634,631.50 in attorney’s fees, $81,646.99 in costs and expenses, and prejudgment interest to be calculated and submitted by QuantumScape. QuantumScape was required to submit a proposed judgment and an affidavit calculating the accrued interest by February 9, 2023.