Arbitration & ADR Practice

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Note: For a listing of articles Judge Waddington has written and had published, and to read more about Judge Waddington, you may visit his website at http://www.judgewaddington-adr.com/.

Judge Lawrence Waddington (Ret.)

Acknowledgement

The author is indebted to Pepperdine University Law School and the Straus Institute for Dispute Resolution. In my capacity as an adjunct faculty member of the Law School, the opportunity to participate in a variety of alternative dispute resolution processes enabled me to discern the legal dimensions of arbitration and mediation. My long association with the Institute and its co-director Peter Robinson has facilitated my publication of these materials. I am indebted to him for his support as well as former Director Randy Lowry.

Writing for the Internet is not the same as writing for publication. This project could never have succeeded without expertise in preparing the web site and text. Endless hours of advice from Mike Winkelmann, owner of Red Lance Computer Consulting, and his associate Mark Cicchetti were invaluable.

Editorial skills of Susan Ahn and Tanaz Kouhpainzhad have contributed to the preparation of Arbitration & ADR Practice. I am grateful for their assistance in assuring accuracy and format of the text.

In the rapidly expanding world of ADR in general and arbitration in particular, the Internet promises an invaluable resource for lawyers. In the hope this Internet practice manual will serve as a useful tool for lawyers to access comprehensive and immediate information, these materials were prepared.

Lawrence Waddington

Dedication

Dedicated to my wife Jane, whose unflagging patience and encouragement were indispensable to me.


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Part One: Arbitration & Mediation in General: Federal Court

Preface

Chapter I. Arbitration Law in General: Federal Court

A. Commercial Arbitration Claims

B. Federal Statutory Claims

C. Arbitrable & Non-Arbitrable Claims

D. State Arbitration Claims

1. State Commercial Claims

2. State Statutory Claims

E. Arbitration Proceedings

F. Court Annexed (Judicial) Arbitration

G. Labor Arbitration (LMRA)

1. Collective Bargaining Agreements (CBAs)

2. Railway Labor Act (RLA)

3. Airlines

H. Admiralty

I. International Arbitration

J. Appraisals

K. Patents

L. Copyright

M. Bankruptcy

N. Trade or Industry Arbitration

O. Public (Governmental) Arbitration

P. ERISA

Q. Motor Vehicle Franchise Act
R. Receivers

Chapter II. Jurisdiction: Federal Court

A. Subject Matter Jurisdiction

1. Federal Question

2. Constitutional Jurisdiction: Case or Controversy

3. Labor Arbitration (Labor Management Relations Act (LMRA)  

4. International Arbitration

B. Diversity Jurisdiction

C. Diversity Rules

1. Joinder of Moving Parties

2. Amount in Controversy

3. Non-Parties

4. Corporate Status

5. Removal & Remand

D. Supplemental Jurisdiction

E. Collateral Jurisdiction: Federal & State

1. Arbitrable and Non-Arbitrable Claims

2. Arbitrable and Non-Arbitrable Third Parties

3. Joinder of Parties

4. Mixed Federal & State Claims

F. Concurrent Jurisdiction: Federal & State

1. Abstention

2. Anti-Injunction Act

3. All Writs Act

4. Full Faith & Credit

5. Rooker Feldman Doctrine

6. Jurisdiction & Manifest Disregard of Law

G. Exclusive Federal Jurisdiction

1. ERISA

2. Carmack Amendment (Household Goods) 

3. Copyright

4. Patents

H. Jurisdiction in Arbitration by Consent

I. Jurisdiction After Order to Arbitrate

J. "Administrative" Jurisdiction

K. Insurance Exception: McCarran Ferguson Act

L. Consumer Warranty: Magnuson Moss Warranty Act

 

Chapter III. Arbitration: Statutory Authority: Federal Court

A. Contractual Arbitration

1. Arbitration Defined

2. Components of Arbitration

a. Arbitral Forum

b. Procedural Fairness

c. Binding Agreement

d. Arbitrator Neutrality

B. Federal Arbitration Act (FAA)

1. Scope of Coverage

a. Commercial Claims

b. Federal Statutory Rights

c. Labor Arbitration & Statutory Rights

2. Coverage of Claims "Thereafter Arising"

3. "Writing" Required

4. "Commerce" Required

a. "Commerce" Defined

b. Interstate Commerce

c. "Workers" in Interstate Commerce

5. Exclusion from Coverage

6. Order to Arbitrate

a. Appeal from Order to Arbitrate

b. Appeal from Order Denying Arbitration

7. Order Staying Litigation

8. Jury Waiver

9. Venue

a. Petition to Compel Arbitration

b. Petition to Confirm Award

10. Selection of Arbitrators

a. Contractual Selection

b. Party Selected Arbitrators
c.  Arbitrator Disclosure

11. Appointment of Arbitrator

12. Conduct of Arbitration

a. Discovery

b. Discovery in Collateral Litigation

c. Arbitrator Authority

1.) Remedial Powers

2.) Subpoena Power
3.) Summary Judgment

d. Arbitration Hearing

13. Immunity of Arbitrator

14. Appeal from Judgment After Award

15. Drafting Arbitration Clauses

Chapter IV. Initiating Arbitration: Federal Court

A. Doctrine of Preemption

B. Federal Policy

C. Presumption of Arbitrability

D. Standing

E. Arbitrability: Ordering Arbitration

1. Severing Merits from Arbitration Clause

2. Burden of Proof

3. Evidentiary Hearing

4. Incorporation of Documents

5. Prior Arbitration & Subsequent Arbitration

6. Prior Arbitration & Subsequent Litigation

7. Industry Practices

F. Arbitrability: Interpreting the Arbitration Clause

1. Agreement to Arbitrate:

a. Existence of Arbitration Clause/Contract

b. Objections to Arbitrability

c. Expired Contracts

d. "Stand Alone" Clauses in Contracts

e. Implied Agreement to Arbitrate

f. Incomplete Agreement to Arbitrate

g. Breach of Arbitration Agreement

2. Arbitrable Parties

a. Third Parties

b. Signatory Enforcing Contract Against Non-Signatory

c. Non-Signatory Enforcing Contract Against Signatory

d. Arbitrable & Non-Arbitrable Claims

e. Mischaracterization of Parties

f. Indemnity

3. Arbitrable Issues & Scope

a. Broad Clauses

b. Narrow Clauses

c. Submission Agreement

4. Conflicting Clauses

5. Multiple Clauses

6. Ambiguous Clauses

7. Merger Clauses

8. Illusory Clauses

G. Enforcing or Revoking Arbitration Clauses

1. Validity of Agreement to Arbitrate

2. Objections to Enforcement of Agreement

a. Unconscionable Clauses

1.) Unilateral Change of Terms

2.) Confidentiality Agreement

3.) Unfair Arbitration Panel

4.) Fraud

b. Rescission

3. External Constraints to Arbitration

4. Public Policy

5. Remedial Limitations

a. Arbitration Fees and Costs

b. Arbitration Fee Disputes

H. Procedural Law & Arbitrability

1. Forum Selection Clause: Situs

a. Selection of Arbitration Forum

b. Conflicting Sites

c. Wrong Site

2. Choice of Law Clause

3. Statute of Limitations

a. Contractual Limitations

4. Laches

5. Counter Claims

6. Consolidation

7. Severance

8. Class Actions & Classwide Arbitration

9. Time of the Essence Clause

10. Federal Rules of Civil Procedure (FRCP)

11. Arbitration Service Provider Rules

12. Mandamus (Mandate)

13 Administrative Conditions

14. Voluntary Dismissal of Complaint

15. Sanctions

I. Substantive Law & Arbitrability

1. Remedies

a. Contractual Remedies

b. Provisional Remedies

1.) Injunction During Arbitration

2.) Injunction Prohibiting Arbitration

c. Equitable Remedies

d. Statutory Remedies

e. Punitive Damages

2. Contractual Conditions Precedent

3. Prior Arbitration Decisions

a. Evidence

b. Summary Judgment

J. Res Judicata & Collateral Estoppel

K. Waiver of Right to Arbitrate

1. Litigation Conduct

2. Implied Waiver

3. Burden of Proof

4. Arbitrator Decision on Waiver

L. Waiver of Administrative Forum

Chapter V. Awards: Federal Court

A. Finality of Award

1. Partial Award

2. Ambiguous Award

3. Collateral Attack of Award

B. Modification or Correction of Award

1. Evident Miscalculation

2. Issues Not Submitted

3. Imperfect in Form

4. Attorney Fees

5. Interest
6. Severance of Illegal or Unenforceable Term

C. Confirmation of Award

D. Vacating Award

1. Corruption, Fraud or Undue Means of Arbitrator

2. Evident Partiality of Arbitrator

3. Arbitrator Misconduct

4. Arbitrator Exceeds Powers

E. Rehearing of Arbitration

F. Manifest Disregard

G. Public Policy

H. Deposing the Arbitrator
I.  Discovery Disputes

J.  Venue

Chapter VI. Appeal: Federal Court

A. Appellate Jurisdiction

1. Standard of Review

2. Waiver of Appeal

B. Appealable Orders

1. Order Refusing Stay of Litigation

2. Order Denying Petition to Compel Arbitration

3. Order Confirming or Denying Confirmation of Award

4. Order Correcting or Vacating Award

5. Order Enjoining Arbitration

6. Order Dismissing Action

C. Non-Appealable Grounds

1. Order Staying Litigation

2. Order Compelling Arbitration

3. Order Refusing to Enjoin Arbitration

D. Sanctions

E. Private Panel Appeal

Chapter VII. Court Annexed (Judicial) Arbitration: Federal Court

A. Exemption from Arbitration

B. Consent to Arbitrate (Non binding)

C. Arbitrator Powers

D. Arbitrator Subpoenas

E. Arbitrator Disclosure & Disqualification

F. Trial de Novo  (TDN)  

G. Arbitrator Immunity

H. Judgment

Chapter VIII. Court Annexed (Judicial) Mediation: Federal Court

A. Settlement Procedure: Court Rules

B. Court Rules: Non-compliance

C. Confidentiality

D. Disqualification of Neutral

E. Early Mediation

Part Two: Arbitration, Mediation, Court Reference & Temporary Judges in State Court

 

Chapter IX. Arbitration Law in General: State Court

A. Commercial Arbitration Claims

B. Federal Statutory Claims

C. State Statutory Claims

D. Categories of Arbitration

E. Court Annexed Arbitration (Judicially Ordered)

F. Labor Arbitration

1. Federal Preemption

2. Labor Law

3. Administrative Preemption

G. International Arbitration

H. Workers Compensation Arbitration

1. Jurisdiction

2. Costs

I. California Rules of Court (CRC)

J. Local Court Rules

K. Arbitration Service Provider Rules

L. Mediation/Arbitration

M. Umpires

N. Appraisals

O. Self Regulating Organizations (SRO)

P. Securities Transactions

Q. Patents

R. Attorney-Client Disputes

S. Attorney Authority

T. Malicious Prosecution
U. Anti SLAPP Motions

Chapter X. Court Annexed Arbitration (Judicial): State Court

A. General Rules

B. Judicially Ordered Arbitration

C. Exemptions to Judicially Ordered Arbitration  

1. Equitable Relief

2. Class Actions

3. Small Claims

4. Unlawful Detainer

5. Family Law

6. Local Rules

7. Monetary Limit

D. Rules of Practice

1. Judicial Council Rules

2. Local Rules

E. Civil Cases: Superior Courts with 18 or more Judges

F. Civil Cases: Superior Courts with fewer than 18 Judges

G. Limited Civil Cases

H. Motor Vehicle Cases

I.  Status Conference

J. Amount in Controversy

K. Equitable Relief

L. Discovery Prior to Arbitration

M. Rules of Evidence

N. Punitive Damages

O. Powers of Arbitrators

P. Trial de Novo (TDN)

Q. Costs and Fees after Trial de Novo (TDN)

R. Discovery After Trial de Novo (TDN)

S. Evidence-Reference in Subsequent Trial

T. Voluntary Dismissal

U. Finality of Award

V. Statute of Limitations

W. Disqualification of Arbitrator

1. Statutory Disclosure: Conflict of Interest

2. Rules of Court Disqualification

X. Sanctions

Y. Offer to Compromise

Z. Arbitrator Testimony

AA. Costs in General

BB. Collateral Estoppel & Res Judicata

Chapter XI. Court Annexed (Judicial) & Voluntary Mediation: State Court

A. Mediation Defined

B. Civil Action Mediation (CCP 1775)

1. Discovery Rights

2. Evidence and Mediation

a. Confidentiality of Communications

b. Mediator Reports & Findings

c. Mediator Testimony

d. Offers to Compromise

e. Conclusion of Mediation

3. Statute of Limitations

C. Settlement

D. Disclosure by Mediators

E. Disqualification of Mediator

F. Mediation as Condition Precedent to Arbitration

G. Mediation Fees & Costs

H. Insurance Mediation

I. Real Estate Mediation

1. Development Projects

2. Subcontractors

J. Family Law Mediation

K. Rescission of Agreement

L. Appellate Mediation

(Note: See Chapter 25 regarding Early Neutral Evaluation)

 

Chapter XII. Jurisdiction: State Court

A. Jurisdiction in General

1. Notice to Arbitrate

2. Service of Suit Clause

B. Subject Matter Jurisdiction

1. Consent to Jurisdiction
2. Arbitrator Authority

C. Judicial Jurisdiction in Arbitration

D. Appellate Jurisdiction

E. Arbitrator Jurisdiction

F. Foreign Corporations

Chapter XIII. Preemption & Policy: State Court

Introduction

A. Federal Preemption in State Court

1. Federal Arbitration Act (FAA) Preemption

2. Conflict Preemption

B. State Preemption

C. California Policy

D. Presumption of Arbitrability

Chapter XIV. Arbitration: Statutory Authority: State Court

A. Distinguishing Categories of Arbitration

B. Arbitration Defined

C. Statutory Requirements

1. Written Agreement

2. "Controversy" Required

3. "Parties" Defined

4. Appraisals

D. Order to Arbitrate

1. Waiver

2. Revocation of Arbitration Clause

3. Third Parties

4. Stay of Arbitration

E. Stay of Litigation

F. Appeal from Order to Arbitrate

G. Appeal from Order Denying Arbitration

H. Severance of Non Arbitrable Issues

I. Appeal of Other Orders

J. Mandate

K. Priority of Arbitration

L. Labor Arbitration

1. Preemption

2. Statutory Claims

3. Public Employees

M. Costs of Arbitration

1. General Rule

2. Health Care Plans

N.  Representation by Counsel

O.  Drafting Arbitration Clauses

 

Chapter XV. Initiating Arbitration: State Court

A. Self-Executing Arbitration Clause

B. Petition to Compel Arbitration

1. Filing Petition to Compel

2. Standing

3. Notice: Litigation Filed

4. Notice: Litigation Not Filed

5. Service of Petition

6. Service of Petition Outside State

7. Response to Petition

8. Amending the Complaint

C. Venue

1. Petition Prior to Arbitration

2. Petition After Arbitration

3. Alternative Counties

4. Pending Action

5. Continuing Jurisdiction of Court

6. Change of Venue

 

Chapter XVI. Hearing on Petition to Compel Arbitration: State Court

Introduction

A. Preemption

1. Interstate Commerce

2. "Workers"

B. Severing the Merits

C. Burden of Proof

D. Evidence

E. Pleadings

F. Arbitrability: Interpreting the Arbitration Clause

1. Objections to Arbitrability

2. Gateway Issues

3. Existence of Agreement to Arbitrate

4. Formation of Agreement

a. Agreement to Arbitrate

b. Written Agreement

c. Incorporation of Documents

d. Ambiguous or Disputed Arbitration Clauses

e. "Stand Alone" Contracts  

f. "Carve Out" Clauses

g. Arbitration Service Provider Rules

5. Arbitrable Parties & Issues

a. Other Issues Between Same Parties

b. Other Issues with Third Parties

c. Third Parties in General

d. Consolidation

e. Severance of Parties & Issues

f. Signatory & Non-Signatory Parties

g. Non-Signatory and Signatory Parties

h. Third Party Beneficiaries

i. Medical Contracts & Third Parties

j. Additional Parties

k. Alter Ego 
l. Judicial Estoppel

6. Arbitrable Issues: Scope of Clause

7. Broad Clauses

a. Disputes "Arising Out Of" Clauses

b. Disputes in "Disputes Over" Clauses

c. Disputes "Concerning the Terms"

8. Narrow Clauses

9. Conflicting Clauses

10. Multiple Clauses

11. Expired Contracts

12. Counter Claims

13. Remedial Limitations

14. Attorney Fees: Petition to Compel

15. Statement of Decision Denying Petition to Compel

16. Incorporation of Arbitration Service Rules

17. Duration of Arbitration Agreements   

18. Collective Bargaining Agreements (CBAs) & Labor Code

 

Chapter XVII. Revoking or Enforcing Arbitration Clauses: State Court

A. Revocation of Agreement

B. Procedural Law & Arbitrability

1. Statute of Limitations

2. Laches

3. Forum Selection Clause

a. Arbitration Forum Clause

b. Contractual Forum Selection Clause

4. Forum Non Conveniens

5. Choice of Law Clause

6. Severance of Arbitration Clause

7. Contractual Remedies

8. Conditions Precedent

9. Summary Judgment

a. Arbitrability

b. Arbitration

10. Costs & Fees

11. Class Actions & Classwide Arbitrations

12. Sanctions

13. Administrative Remedies

C. Substantive Law & Arbitrability

1. State Statutory Claims

2. Federal Statutory Claims

3. Adhesive Contracts

4. Unconscionable Clauses

a. Procedural & Substantive Contractual Arbitrability

b. Employment Contracts

c. Unilateral Change of Terms

d. Public Policy

e. Discovery Rights

f. Confidentiality of Award 

g. Confidentiality of Proceedings

5. Statutorily Mandated Arbitration Clauses

a. Real Estate Contracts

1) In General

2) Home Improvements

3) Lis Pendens

4) Conditions Precedent

5) Arbitration Clauses

6) Referees

7) CC&Rs

b. Consumer Contracts

1. Arbitration Costs

2. Consumer Remedies

c. Health Care Service Providers

1) Arbitration Clauses

2) Patients Bill of Rights

d. Medical Service Contracts

e. Skilled Nursing Facility

f. Landlord/Tenant Contracts

g. Land Use

h. Residential Construction

i. Common Interest Development

j. Construction Sub-Contracts

k Disability Insurance

l. Fire Insurance

m. Hazardous Substance Act

n. Uninsured Motorist

o. Automobile Repair

p. Mobile Home Residency

q. Eminent Domain

r. Probate

s. Franchises

t. Public Construction Contracts

6. Common Law Claims

a Mutuality of Assent

b. Mutuality of Remedy

c. Consideration

d. Fraud

e. Mistake

f. Good Faith & Fair Dealing

7. Illegal or Invalid Contracts

8. Illusory Contracts

9. Family Law

10. Costs of Arbitration
11. Drafting Arbitration Clauses

D. Res Judicata & Collateral Estoppel

1. Collateral Estoppel

2. Res Judicata

3. Labor Contracts

4. Federal Jurisdiction

E. Remedies

1. Arbitrator Remedies

2. Judicial Remedies

3. Provisional Remedies

a. Attachments

b. Receivers

c. Injunctions

1. Public Benefit

2. Private Party

F. Jury Waiver

G. Jurisdiction after Order to Arbitrate

1. Vestigial Jurisdiction

2. Motion to Reconsider

H. Waiver of Arbitration

Chapter XVIII. Selection or Appointment of Arbitrator: State Court

A. Statutory Authority

B. Party Arbitrators

C. Arbitrable Forum

 

Chapter XIX. Arbitrator Disclosure and Disqualification: State Court

A. Contractual Arbitration

1. Disclosure by Arbitrator

2. Disclosure by Arbitrator in Residential Construction

3. Disqualification of Arbitrator

4. Disqualification of Judge

B. Appeal

C. Judicial (Court Annexed) Arbitration

Chapter XX. Conduct of Arbitration: State Court

Introduction

A. Witnesses

B. Arbitrator Powers

C. Evidence

D. Absence of Party

E. Evidence by Arbitrator

F. Depositions

G. Deposition Restrictions

H. Discovery

I. Subpoenas

J. Sanctions

K. Remedies

L. Arbitrator Immunity

M. Arbitration Service Provider Rules

N. Default or Withdrawal
O. Self Representation

Chapter XXI. Awards: State Court

A. Form of Award

1. Disputes After Award

2. Health Care Awards

3. Employment Awards

4. Public Agency Awards

5. Electronic Signature

B. Service and Timeliness of Award by Arbitrator

C. Corrected Award by Arbitrator

1. Time to Correct

2. Manner of Correction

a. Absence of Objection to Correct

b. Reconsideration of Award

D. Amended Award by Arbitrator

E. Jurisdiction of Arbitrator

F. Judicial Review of Award

1. Confirmation, Correction or Vacating Award

2.  Service of Confirmed ,Corrected, or Vacated Award

3. Scope of Review

4. Judicial Clarification of Award

5. Judicial Correction of Award

a. Evident Miscalculation or Misdescription          

b. Arbitrator Exceeded Powers 

c. Award Imperfect in Form
d.  Severance of Illegal or Unenforceable Terms

6. Confirmation of Award

7. Vacating an Award

8. Grounds to Vacate Award

a. Fraud, Corruption or Undue Means

b. Misconduct of Arbitrator

c. Arbitrator Exceeded Powers

d. Refusal to Postpone Hearing or Hear Evidence

e. Disqualification of Arbitrator

f. Rehearing

g. Conditions to Vacate

G. Disqualification of Judge

H. Fees & Costs

1. Arbitration Fees

2. Attorney Fees

3. Costs

I. Interest

J. Statement of Decision

K. Unconfirmed Award

L. Arbitration Service Provider Rules

M. Jurisdiction to Complete Award
N.  Res Judicata Effect of Award

Chapter XXII. Appeal: State Court

A. Appeal of Award

B. Finality of Award

C. Appealable Orders

1. Order Denying Petition to Compel Arbitration

2. Order Dismissing Petition

3. Order Vacating Award

4. Order Denying Petition to Vacate Award

5. Judgment Confirming Award

6. Special Order After Judgment

D. Scope of Review

E. Costs & Sanctions on Appeal

F. Role of Federal Arbitration Act (FAA)

G. Manifest Disregard of Law

H. Second Level Arbitration Appeal

 

XXIII. Referees: State Court

A. Authority of Referee

B. Objections to Reference Decision

C. Arbitration Rules in General Reference

D. Costs

E. Immunity

XXIV. Temporary Judges: State Court

A. Constitutional Authority

B. Non-Constitutional Authority (CRC)

C. Attorneys Appointed by Court

D. Attorneys Requested by Parties

 

XXV. Early Neutral Evaluation
 
Table of Authorities

Index

 

 

Preface  [TOC]

The promise of arbitration as an expedient, efficient and inexpensive alternative to litigation has expanded this form of alternative dispute resolution (ADR) despite unrelenting challenges from critics. Arbitration, originally conceived as an informal resolution process conducted by members of the business community experienced in commercial trade, has evolved to include disputes in employment, consumer transactions, real estate sales, and health and services agreements. The volatility of each of these expanded categories incites critics to bemoan the loss of jury trial in arbitration, diminished opportunities for appeal, loosened evidentiary strictures, and burdens imposed on a party to pay costs of arbitration. Yet as one commentator predicted more than two decades ago: "If more is not done to reduce the expense of litigation, the legal profession will be destroyed. If the courts of this country cannot handle litigation at reasonable expense, then some suitable mechanism for dispute settling will be needed;" Kirkham, Francis, 1981 BYU. L. Rev. 741.

With Congressional enactment of the Federal Arbitration Act in 1925, the United States Supreme Court eventually rejected judicial hostility to arbitration and provided the impetus for stimulating an alternative to litigation. New York had already developed an arbitration program, and California ultimately enacted legislation confirming its commitment to an alternative to litigation.

The California Supreme Court expressed the original intent of arbitration: "By voluntarily submitting to arbitration, the parties have agreed to bear the risk [of arbitrator error] in return for a quick, inexpensive and conclusive resolution to their dispute. The parties to an arbitral agreement knowingly take the risks of error of fact or law committed by arbitrators, and this is a worthy 'trade off' in order to obtain a speedy decision by experts in the field whose practical experience and world reasoning will be accepted as correct by other experts;" Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992).

But arbitrators, originally selected by the business community for their expertise, no longer exclusively comprise panelists engaged in arbitration. Knowledge of an industry, trade or occupation and its custom and habits may actually tend to disqualify an arbitrator similar to the evolution of jury trials originally composed of members of a community who knew the parties. Accordingly, the California Legislature has sought to impose restrictions on arbitrators themselves rather than the arbitral process by enacting substantial disclosure requirements. Yet no one should expect arbitration to remain stagnant and redolent of the past.

Repeated exposure of arbitration to challenge and criticism compels the courts to seek a balance between promise and fulfillment. Evidence of inequities, abuses, or unfair arbitral processes reviewed by courts prior to or subsequent to an arbitration enable the judiciary and legislature to revisit the quest for a fair and equitable alternative to litigation. That goal is crucial.

State and federal courts have also sought to relieve litigation caseloads by encouraging mediation of disputes. Characterized as "judicially ordered" (or "court annexed"), the court orders parties and counsel to meet with each other and a mediator in an attempt to settle a dispute informally. In many cases, counsel will recommend private mediation without a court order. In either event, the purpose is potential settlement and to avoid litigation. Although mediation is informal and without the structure of arbitration, the rules of litigation are as important for purposes of discussing settlement in this form of alternative dispute resolution (ADR) as in arbitration. For these reasons, mediation is included in these materials although framed in legal parameters rather than style or strategy.

Selection of a dispute resolution process, either arbitration or mediation, has emerged as a dominant factor for lawyers seeking to professionally represent their clients. But arbitration and mediation no longer qualify as stable and immutable topics. The Internet provides instant research to track the ebb and flow of statutory and decisional law in state and federal courts. Accordingly, this electronic practice manual was prepared. Regular updates are also the key to a successful alternative dispute resolution practice.

These materials do not purport to substitute critical analysis in textbooks or replace thoughtful philosophic review of ADR, but are prepared for lawyers who need an immediate and current summary of arbitration law or other forms of dispute resolution. This compilation and analysis of federal and state statutes, case law and commentary serves as a basis for drafting arbitration clauses in contracts, preparing briefs, practicing in arbitration and engaging in oral advocacy at the trial and appellate level.

Introduction

In 1925, the United States Congress responded to complaints of an increased Federal court litigation caseload by enacting the Federal Arbitration Act (FAA) statutorily confirming the validity, irrevocability and enforcement of arbitration clauses in commercial agreements. Despite subsequent acknowledgment by the United States Supreme Court that the FAA required Federal courts to reverse their historical antipathy to arbitration and henceforth enforce private contractual agreements, individual States prohibited arbitration or imposed burdensome restrictions on the process. In addition, the vast majority of civil litigation occurred in state courts, restricting the impact of the FAA to Federal courts vested with diversity jurisdiction. Except for New York, a state already operating under statutorily enacted arbitration, litigation remained the forum of choice.

In California, the Legislature also perceived a need to reduce court congestion, and in 1961 enacted a series of arbitration statutes embodied in the California Arbitration Act (CAA). California lawyers invoked arbitration in State court on occasion, but the Legislature had not repealed several other statutes prohibiting arbitration of specific categories of litigation. For two decades, arbitration languished in California and, with occasional exceptions, hostility to this form of alternative dispute resolution continued in most other State courts.

In 1984 the tide turned. The United States Supreme Court reviewed a California Supreme Court decision upholding a statute exempting franchise contracts from arbitration. Granting certiorari in Southland Corp. v. Keating, 465 U.S. 1 (1984), the Supreme Court reversed the California Supreme Court, holding that the FAA preempted any State arbitration law foreclosing or inhibiting the use of arbitration. In Southland, the Court withdrew the power of states to mandate a judicial forum for resolution of commercial disputes within the scope of the FAA if the contracting parties had agreed to arbitration. The source of federal power, the Court had said earlier in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), was based . . ."on the incontestable federal grounds of control over interstate commerce outlined in the Commerce Clause. . ." Invoking the Supremacy Clause of the United States Constitution in Southland, the Court eviscerated State anti-arbitration statutes or judicial decisions and required those courts to enforce arbitration clauses in commercial interstate transactions.

The Southland court, contending the California Supreme Court decision eroded federal power, held that the FAA confers on Federal and State courts a "substantive body of law" to decide whether an agreement is subject to arbitration, i.e., "arbitrable", but assigning resolution of the merits of the underlying dispute to the arbitrator pursuant to State contract law. Aside from the questionable legal analysis of Southland and Prima Paint (see dissents in both cases), irony lay in the United States Supreme Court enforcing an arbitration clause the California Supreme Court had refused to apply under the California the CAA.

In preempting State statutory and decisional law forbidding or impeding arbitration as an alternative to litigation, the Court discussed the issue of federal jurisdiction. Article III of the United States Constitution confers federal subject matter (original) jurisdiction of civil litigation on three sources involving: "federal questions"; Constitutional issues; a federal statute or treaty; 28 U.S. C. 1331. Diversity jurisdiction also qualifies as original jurisdiction based upon a federal statute enacted by Congress authorizing federal courts to resolve disputes between citizens of different States; 28 U.S.C. 1332.

According to the Supreme Court in Southland, the FAA did not confer subject matter jurisdiction because the statute provided no "rights" but only a "remedy", i.e., to enforce arbitration agreements. Absent original subject matter jurisdiction, except in limited circumstances, only by removing a state case on grounds of diversity jurisdiction could a party directly seek arbitration in a District Court. Filing a cause of action in state court alleging violation of a federal statute, said the Court in Southland, does not constitute a "federal question."

In a series of subsequent decisions, the United States Supreme Court repeatedly endorsed arbitration in principle, broadened its application of "commercial" transactions by expanding the scope of "interstate" commerce, included federal statutory rights within the ambit of arbitrable issues, and rejected objections to this alternative format to dispute resolution. The California Supreme Court ultimately followed the lead, and, in two major decisions, re-examined its original arbitration jurisprudence. In Moncharsh v. Heily & Blaise, 3 Cal.4th 1 (1992) the court endorsed the use of arbitration, and in Advanced Micro Devices, Inc. v. Intel Corp., 9 Cal.4th 362 (1994) conferred a broad scope of remedial authority on arbitrators. Thereafter, arbitration flourished in California-although not without criticism.

Unlike Congressional optimism generating the FAA, United States Supreme Court opinions have not suggested their endorsement of arbitration will reduce judicial caseload. And the Court does not conclude arbitration will enhance efficiency, in fact, the Justices conceded that judicial enforcement of arbitration clauses may result in duplicate and parallel litigation in State and Federal courts. Despite these impediments, the Court probably recognized the success of arbitration in resolving issues in labor/management contract disputes, or Congressional adoption of arbitration to resolve international disputes between United States business entities and those of foreign countries. The purpose of the FAA, as far as Federal courts are concerned, is to enforce arbitration agreements between parties consistent with terms of their contract.

Although acclaimed by courts a viable alternative to litigation in achieving finality of a dispute, critics challenge arbitration on a variety of philosophic grounds or criticize the process procedurally and substantively. These materials do not address this debate, except to note objections to arbitration in the context of specific litigation, focusing instead on a wide variety of practical legal questions decided by Federal and State courts. Disagreements between Federal Circuit Courts of Appeal on arbitration issues are not uncommon, and California State courts frequently differ with Ninth Circuit decisions on identical issues. Because differences in the language of the FAA and CAA exist, coupled with the doctrine of federal preemption, the superficial simplicity of arbitration is deceiving.

For lawyers who prepare contracts, these judicial decisions require constant monitoring in order to craft an enforceable arbitration clause including-and excluding-specific issues. Parties embarking on a venture often devote extensive time drafting details of a contract on the assumption their relationship will succeed, yet ignore or minimize a method for resolution of future problems. If a client agrees to arbitration, counsel must not only consider the language of an arbitration clause in a contract, but also review a checklist of arbitral issues arising out of a factual conflict or disagreement between the parties. To assist counsel who actively participate in the arbitration process, whether required by an arbitration clause written in a contract, by stipulation of the parties, or statutorily mandated, these materials will hopefully provide guidance to avoid pitfalls.

Arbitration clauses in contracts are quintessentially a matter of agreement between parties to decide a dispute extra-judicially pursuant to terms agreed upon and incorporated into their contract or subsequently adopted when a disagreement emerges. Both alternatives import substantive statutory and decisional contract law, procedural law, evidence, and the law of legal and equitable remedies. In California, the procedural law of arbitration is statutorily detailed in the CAA but the FAA provides a less comprehensive mechanism for regulating contractual arbitration. A modest number of federal statutes are relevant, but decisional law dominates.

Arbitration is designed to produce a final and "binding" award, subsequently confirmed by petitioning a court to enter judgment, and subject to limited judicial review in state and federal courts. Other judicial resources, although not within the ambit of "binding" arbitration, include "judicially ordered" non-binding arbitration in Federal and California courts. To encourage the use of mediation, also a familiar non-binding process intended to settle disputes, the California Legislature enacted a series of statutes confirming this alternative. The legislators amended the Evidence Code to provide "finality" to a successful mediation and assure confidentiality of the agreement to the parties.

Resolution of disputes is not confined to court ordered ADR.  Arbitration service providers offer panels of retired judges and experienced lawyers who conduct mediation and arbitration independently of the courts.  Awards in arbitration or settlements in mediation and confirmed in a judgment entered by the court.

In addition to arbitration and mediation, California offers parties the option of selecting a Referee to decide factual disputes as an adjunct to litigation or alternative to litigation. Parties can also seek court appointment of a Temporary Judge clothed with the same judicial power as a sitting judge and who renders a judgment subject to appeal.

In federal courts, Congress has expanded the variety of dispute resolution formats available to District Court judges. The close philosophic relationship between binding arbitration, judicially ordered arbitration/mediation, voluntary mediation, and, in California, a Referee or Temporary Judge, warrants discussion of each subject.

Materials in this Manual are arranged in two Parts according to the federal or state arbitration forum. Topics include: jurisdiction; classification of arbitration or other dispute resolution process chosen by parties or imposed on them by operation of law; the procedure for initiating arbitration; defenses against arbitration; procedural law prior to and during arbitration; substantive contract law; arbitrator disclosure and disqualification; Rules of Court; Rules of arbitration service providers; conduct of the hearing; remedies the arbitrator can impose; confirming, correcting and vacating the award; appeal.

Depending on the arbitral forum, i.e., state or federal, interpretation of state substantive contract law and procedure may vary. In attempting to outline the materials comprehensively, initial chapters track the course of arbitration from its inception. But Sections on provisional remedies, choice of law clauses, forum selection clauses, arbitration procedural rules, and selection of an arbitrator may need review prior to an arbitration or in drafting a contractual arbitration clause. Therefore, cross referencing between topics in state and federal courts has been emphasized.

Arbitration clauses in contract disputes dominate case law, but parties in California can agree to submit most any disputes to arbitration (except family law). Most tort litigation is obviously not initially subject to a pre-dispute agreement (unless coupled with contract), but parties can agree to arbitrate cases on personal injury, wrongful death or product liability. Federal and California decisional law permit, with some limitations, contractual agreements to arbitrate allegations of statutory violations in addition to civil actions alleging common law breaches.

Although parties waive jury trials in arbitration, advantages of arbitration include the right of counsel to select the arbitrator(s); agree on a mutually acceptable location and convenient time for the hearing; preserve privacy to the parties; and adopt procedural rules. Although discovery is statutorily limited in arbitration, counsel can agree to this litigation tool subject to terms of their contract or arbitrator approval. Despite objections to arbitration, particularly the absence of a jury, Federal/State legislation and case law in both jurisdictions confirm the continuing viability of this method of dispute resolution.

Federal and state policies continue to favor arbitration, but courts have not ignored warning signs of potential dangers. Arbitrators are not required to strictly adhere to substantive or procedural law of the jurisdiction; can forego writing a decision (with some exceptions) or explaining their decisions; and judicial review of arbitration awards is severely limited. These perceived deficiencies are trade-offs for a speedy and economical alternative to delay and expense of civil litigation. But to preserve the integrity of the process, the practice of arbitration must comport with minimum standards of fairness and assure the parties of impartial arbitrators. To that end, California and federal courts have imposed restrictions on: adhesive arbitration clauses; unconscionable arbitration clauses; lack of contractual mutuality or assent; excessive arbitration fees or costs; and violations of public policy. Statutorily mandated disclosure of arbitrator background is extensive in California law but less stringent in federal courts. Not all Circuit Courts agree on these topics and individualized research is necessary.

Although counsel may originally file litigation in State court, the opposing party can seek removal to Federal court if diversity jurisdiction attaches. Except for decisional and statutory law involving arbitration issues, these materials do not extensively address the details of jurisdictional guidelines for diversity jurisdiction. Case law in state and federal courts on specific arbitration issues in the context of diversity jurisdiction varies and can result in different outcomes. In litigation "affecting commerce" (a condition for invoking the FAA) filed by a party in state court and not removed, federal preemption may nevertheless override local statutory or decisional law. Lawyers are bound by Circuit Court rulings in Federal District Courts-although not necessarily in State courts unless preempted-but the materials include all Federal Circuit Courts of Appeal to provide comprehensive review. In time, arbitration law from other states will be included.

Lawyers who practice in State courts may erroneously assume that local statutory and decisional laws are sufficient in researching arbitration issues. California State courts have repeatedly emphasized their independence from Federal decisional law, including arbitration of Federal statutory rights. But the preemptive impact of the FAA affects arbitration practice despite a state court forum, and determining the applicability of the FAA is the primary research question. Differences in analysis exist on the same legal issues in state and federal court and jurisdictional tensions are evident: "Decisions by the Ninth Circuit have no grater persuasive force on California courts than those of other circuits;" Ovitz v. Schulman, 133 Cal.App.4th 830 (2005); First Fidelity Bank, FSB v. Durga Ma Corp., 386 F.3d 1306 (9th Cir. 2004).

As noted above, arbitration practice in California is governed by the CAA, unless preempted by the FAA, whereas federal courts are bound procedurally by the provisions of the FAA. Federal Rules of Civil Procedure apply only in judicial proceedings, not arbitration.

Nevertheless, the body of Federal law on arbitration is substantial and useful for precedent in citation to local and out-of-state courts as well as federal district and appellate courts. California decisional law is abundant and will predominate because of sheer volume. The California Supreme Court and Courts of Appeal have decided numerous cases applicable for citation of precedent in other State or Federal courts.

The United States Supreme Court has held that substantive state contract law governs the validity and enforcement of arbitration clauses although many State court decisions resolve local procedural and evidentiary rules. Thus, State contract law will continue to dominate, but not exclude, Federal arbitration law. For a comprehensive footnote on this subject, see Levy v. Skywalker Sound, 108 Cal.App.4th 138 (2003).

In researching statutory and case law, determination of the type of arbitration in issue, i.e., whether contractual, judicially ordered, or statutorily required, is critical. Several court decisions have criticized attempts by counsel to mix categories and draft "hybrid" arbitration procedures. In California, specific kinds of disputes are subject to mandatory arbitration and are either statutorily required (uninsured motorist), or procedurally regulated (medical and health services contracts). Where relevant, courts have used labor arbitration decisions or international arbitration law as precedent to resolve contractual arbitration issues.

With the possible exception of mediation, dispute resolution is an adversarial process, whether in litigation or arbitration. Arbitration does not pretend to correct all issues criticized in litigation nor provided a remedy for discovery abuse or jury unpredictability. Arbitration is a quest for an alternative to litigation, albeit imperfect, but offering a choice for counsel and client; Schoch v. Infousa, Inc., 341 F.3d 785 (8th Cir. 2003).

In the maturing of arbitration, counsel have discovered the ability to manage the process, formulate an agreement incorporating specific litigation principles, dispense with others or add provisions indigenous to the trial or industry involved in the underlying transaction. In some cases, despite the expense, counsel have "litigasized" arbitration by retaining the format of litigation but excluding the jury and the time consuming process of jury selection, voir dire, jury instructions and side bar evidentiary questions. No appeal lies from an arbitration award other than statutorily authorized, but parties can request an appellate panel of arbitrators from an arbitration service provider.

If counsel elect to manage a dispute paralleling selected litigation principles, the cost of drafting an arbitration agreement and conduct of the arbitration may equal litigation expense. But counsel take advantage of other facets of arbitration: selecting the arbitrator(s); defining arbitrator powers; adopting or modifying discovery, requiring a statement of decision (reasoned opinion).

Ultimately, the challenge for counsel is selection of the forum for dispute resolution. Litigation offers juries, a strict application of state and federal substantive law, discovery and a broad range of appeal. Alternatively, arbitration allows lawyers to control and manage the process of the individual case, narrowing the focus and minimizing the grounds for appeal.

A final word about research. Federal and State courts are modifying and distinguishing arbitration law rapidly. These materials are compiled to provide the most recent case law but this goal requires shortcuts. Citations are truncated parallel cites omitted, and extensive commentary or analysis is modest. Until the arbitration process settles into "bright lines", changes are inevitable in the changing world of arbitration and ADR.

 

PART I: ARBITRATION IN FEDERAL COURT

Chapter I. Arbitration Law in General: Federal Court [TOC]

A. Commercial Arbitration Claims [TOC]

The Federal Arbitration Act (FAA) provides that arbitration clauses in written agreements involving interstate commerce are valid, irrevocable and enforceable except in employment contracts of seamen, railroad employees, or transportation workers engaged in interstate commerce, but unenforceable if grounds exist in law or equity for revocation (in reality, "recession") of the arbitration clause; 9 U.S.C. 1-2. The FAA does not confer Federal jurisdiction, does not qualify as an Article III "federal question," and is applicable in federal courts only if diversity of citizenship is established or an otherwise independent ground for jurisdiction exists, i.e., a plaintiff files a federal cause of action or violation of a federal statute and defendant responds by filing a petition to compel arbitration; Moses H. Cone Mem. Hosp. v. Mercury Construction Co., 460 U.S. 1 (1983).

Within its scope, the FAA preempts any state statutory or decisional law singling out contractual arbitration clauses for suspect treatment or restricting enforcement of arbitration clauses; Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996).

The purpose of the FAA is to overcome judicial refusal to enforce agreements to arbitrate, and the statute was intended to place commercial arbitration agreements on the same footing as other contacts; Allied Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995); Volt Information Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ.

489 U.S. 468 (1989). The FAA is a Congressional declaration of a liberal federal policy favoring enforcement of arbitration agreements; Moses H. Cone Mem. Hospital. The Supreme Court has consistently reaffirmed this policy; E.E.O.C. v. Waffle House, Inc., 534 U.S. 279 (2002).

Title 9 U.S.C. 3-16 (FAA) provide the mechanism for implementing and enforcing commercial arbitration agreements in federal court. Any civil action removed from state court on grounds of diversity jurisdiction is subject to the FAA if the underlying litigation includes a written agreement involving commerce and contains an arbitration clause. Validity and enforcement of the clause are judicially resolved at a hearing in response to a petition to compel arbitration; Southland Corp. v. Keating, 465 U.S. 1 (1984)

B . Federal Statutory Claims [TOC]

Absent Congressional intent-recited in a federal statute-to preclude arbitration and provide access solely to a judicial forum, a court can order arbitration of civil actions alleging violation of federal statutory rights. The Supreme Court has held that federal statutory rights, as distinct from common law rights, are subject to arbitration under the FAA if evidenced by a written and otherwise valid and enforceable agreement between parties enabling a claimant to vindicate those rights; 9 U.S.C. 2; Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991); Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Corp., 473 U.S. 614 (1985).

C. Arbitrable and Non-Arbitrable Claims [TOC]

An arbitration agreement may not include (or specifically exclude) certain issues, or parties, from arbitration. 9 U.S.C. 3/4 permit the District Court to order arbitrable claims to arbitration and stay litigation of non-arbitrable claims; Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 413 (1985). The potential for conflicting results is obvious but, according to Dean Witter Reynolds Inc., courts can avoid this issue by invoking rules of preclusion.  In Volkwagen of America v. Sud’s of Peoria, 474 F.3d 966 (7th Cir. 2007) the court held the tiral court could exercise its discretion in determing whether to order arbitration and stay litigation.

Despite the absence of an arbitration agreement restricting issues or parties, if some state claims are arbitrable but others lack an arbitration clause and are not subject to arbitration, or some parties are subject to arbitrable claims and others are not, the court must order arbitration, staying the litigation, despite the potential for conflicting results; Dean Witter Reynolds, Inc. The ramifications of this issue are discussed in Jurisdiction, Ch. III.  Implications for res judicata and collateral estoppel are also involved; Ch. IV-J.

Comment: Ordering arbitration and not staying the action involving arbitrable and non-arbitrable claims engenders the possibility of piecemeal litigation.  Some courts prefer to stay the action on the theory the arbitration award will dispose of the action but the basis of this alternative is tenuous under Byrd.  In Volkswagen of America v. Sud’s of Peoria, 474 F.3d 966 (7th Cir. 2007)  the court concluded the court could stay the action of a non arbitrable claim in the exercise of its discretion.

For civil actions filed in state court alleging violation of state statutory or common law claims subject to arbitration, coupled with non arbitrable claims and removed to federal court, the District Court can exercise supplemental jurisdiction of non arbitrable state claims or remand to state court depending upon resolution of jurisdictional issues; 28 U.S.C. 1367 (c).

See, Collateral Jurisdiction, Ch. II-E

Cross Reference: California law statutorily permits more judicial discretion, including a stay of arbitration, to avoid duplicate or multiple arbitrations and litigation; CCP 1282.2  (c); Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 217 (2005); 24 Hour Fitness, Inc. v. Sup. Ct., 66 Cal.App.4th 1199 (1998).

See,  Part II State Law, Procedural Law &Arbitrability, XVII-B

D. State Arbitration Claims [TOC]

1. State Commercial Claims [TOC]

If a civil action filed in state court alleging breach of a commercial agreement (common law claims) contains an arbitration clause, a party can remove litigation to a District Court only if diversity jurisdiction exists; 28 U.S.C. 1332; 1446. Or, in some circumstances, the moving party can file a petition to compel arbitration directly in Federal court by alleging diversity; Cigna Health Care of St. Louis, Inc. v. Kaiser, 294 F.3d 849 (7th Cir. 2002). Once the District Court assumes jurisdiction, commercial claims are subject to arbitration if the agreement (arbitration clause) is valid and enforceable.

If the District Court lacks jurisdiction of state claims in the absence of an arbitration clause, the trial judge can invoke pendent jurisdiction and retain non arbitrable claims, or, as above, remand to state court.

See, Jurisdiction, Ch. II-A, infra.

2. State Statutory Claims [TOC]

State statutory claims initially filed in a state court and removed to District Court on grounds of diversity are governed by the same rules as arbitration of commercial claims.

E. Arbitration Proceedings [TOC]

Title 28 U.S.C. (FAA 3; 4) autorizes the court to stay litigation and order arbitration.  Once a court stays litigation and orders a case into arbitration, and an arbitrator named, selected or appointed (9 U.S.C. 6), all further judicial intervention ends, other than issuing subpoenas (9 U.S.C. 7), until the arbitrator signs a final award. At that point, the FAA authorizes the court to confirm, correct, modify or vacate the award; 9 U.S.C 12. If the court confirms the award in a judgment, any appeal is on limited grounds; 9 U.S.C. 16.

Note: In the event an arbitrator is unable to continue (death, injury or incapacity) the court must appoint a replacement in the absence of an agreement by the parties; Wellpoint v. John Hancock Ins. Co., 576 F.3d 643 (7th Cir. 2009 ).

See, Appointment of Arbitrator, Ch. III-B-11

See, Order to Arbitrate, III-B-6; Order Staying Litigation, III-B-7

Cross Reference: Part II; State Court: Selection or Appointment of Arbitrator, Ch. XVIII;  Appeal, Ch. VI; Conduct of Arbitration, Ch. III-B-12

Cross Reference: Part II; State Court; Jurisdiction;  Ch. XVII.

F. Court Annexed (Judicial) Arbitration [TOC]

Congress has enacted legislation requiring District Courts to establish panels of lawyers to hear a variety of dispute resolution processes to assist in the resolution of litigation. Or, if the parties consent, an arbitrator can render a non-binding arbitration award; Alternative Dispute Resolution Act, 28 U.S.C. 651; 654(a)(b). A party can reject the award and seek a trial de novo.

Cross Reference: Ch. X: Court Annexed Arbitration in State Court

G. Labor Arbitration (LMRA) [TOC]

The Labor Management Relations Act (LMRA), 29 U.S.C. 185 and National Labor Relations Act (NLRA) 29 U.S.C. 151), acknowledged as one of the most successful methods for arbitrating labor/management disputes, substantially preempts state law; Metro. Life Ins. Co. v. Mass., 471 U.S. 724 (1985); San Diego Union v. Garmon, 359 U.S. 236 (1959). An exception exists if a State statute regulates conduct outside the scope of the Collective Bargaining Agreement (CBA); Johnson v. England, 356 F.2d 44 (9th Cir. 1966); Gregory v. SCIE LLC, 317 F.3d 1050 (9th Cir. 2002); Balcorta v. 20th Century Fox Film Corp., 208 F.3d 1102 (9th Cir. 2002).

In Brennan v. King, 139 F.3d 258 (1st Cir.1998) the court explained: "In the commercial case, arbitration is the substitute for litigation. Here [labor] arbitration is the substitute for industrial strife . . .The [CBA] states the rights and duties of the parties . . .[it] is a generalized code to govern a myriad of cases which the draftsmen cannot wholly anticipate.'' Labor disputes between a labor organization and an employer are covered by LMRA 301(a) and representational disputes by the National Labor Relations Act, 7 &8.

As a topic, labor arbitration of issues within the scope of collective bargaining agreements is not extensively discussed in these materials, but courts may invoke labor law precedent in resolving commercial arbitration; Providence Journal Co. v. Providence Newspaper Guild, 271 F.3d 16 (1st Cir. 2001). Federal courts have joint jurisdiction with the National Labor Relations Board (NLRB) over labor disputes and must defer to the arbitrator in resolving contractual disputes except in cases alleging challenges to union representation; S.E.I.U. v. St. Vincent Med. Ctr., 344 F.3d 977 (9th Cir. 2003).

1. Collective Bargaining Agreements (CBAs) [TOC]

Arbitration agreements between union and management pursuant to an arbitration clause in a CBA do not prevent an individual union member from litigating alleged violation of Federal statutory rights not included within the terms of the contract; Wright v. Universal Maritime Service Corp., 525 U.S. 70 (1998) [Title VII of Civil Rights Act, 42 U.S.C. 2000 et seq.]; Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728 (1981) [Fair Labor Standards Act, 29 U.S.C. 206]; Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974) [Title VII]. Any waiver by a union employee of a statutory claim not included within the CBA must be "clear and unmistakable;" Eastern Associated Coal Corp. v. Massey, 373 F.3d 530 (4th Cir. 2004); Doyle v. Riley's, Inc., 158 F.2d 543 (9th Cir. 1988); Checkpoint CheckCashing v. Snowden, 290 F.3d 631 (4th Cir. 2002).

The Supreme Court modified its holding in Gardner-Denver and confirmed the right of labor unions in the CBA to waive the right of employees to file litigation against the employer, and, in the alternative, arbitrate instead of litigate under the ADEA; 14 Penn Plaza LLC v. Pyett, 129 S.,Ct. 1456 (2009)

In Nance v. Goodyear Tire & Rubber Co., 527 F.3d 539 (6th Cir. 2008) the 6th  Circuit, quoting Alexander, clearly explained the difference between an arbitrator award “of the shop” under a CBA and the “law of the land” under federal statutory rights.  The court did approve introduction of a labor arbitration award (CBA) as evidence in federal court on a Title VII claim based on “the degree of procedural fairness in the arbitral forum, adequacy of the record . . . and the special competence of the arbitrator, or when the issue is solely one of fact, specifically addressed by the parties and decided by the arbitrator on the basis of an adequate record.”

Federal courts have repeatedly, but not universally, deferred to decisions of labor arbitrators in resolving individual grievances pursuant to the LMRA; Line Drivers, Pickup & Delivery v. Roadway Express, 152 F.3d 1098 (9th Cir. 1998). A similar deference is accorded arbitration awards issued under the aegis of the FAA; Providence Journal Co. v. Providence Newspaper Guild; United Paper Workers Int'l. Union v. Misco, 484 U.S. 29 (1987). But in the Ninth Circuit, CBAs are outside coverage of the FAA (Kenner v. District Council of Painting & Allied Trades, 768 F.2d 1115 (9th Cir.1995) and the Federal statute should not be used to review arbitration awards involving CBAs; Poweragent, Inc. v. Electronic Data Systems Corp., 358 F.3d 1187 (9th Cir. 2004).

2. Railway Labor Act (RLA) [TOC]

Railroad workers are governed by the Railway Labor Act (45 U.S.C. 151, et seq.).The National Railroad Adjustment Board (NRAB) has exclusive jurisdiction under the Act to arbitrate employment-related disputes between rail carriers and their employees. Breach of union fair representation disputes are not within the NRAB jurisdiction. Jurisdictional issues between federal courts and NRAB are discussed in Glover v. St. Louis –San Francisco Ry., 393 U.S. 324 (1969).

Disputes between labor and management are divided into "major" and "minor" categories for purposes of judicial review; National R.R. Passenger Corp. v. Transport Workers Union of America, 373 F.3d 12 (D.C. Cir. 2004). Judicial deference to the decision of an arbitrator mirrors resolution of disputes under the LMRA; Consol. Rail Corp. v. Railway Labor Exec. Assn., 491 U.S. 299 (1989).

Preemption of State law governing arbitration of railroad disputes is contingent on the independence of local statutes outside the scope of the CBA and analyzed comparable to LMRA jurisprudence; Hawaiian Air Lines, Inc. v. Norris, 512 U.S. 246 (1994).

3. Airlines [TOC]

Airline pilots are governed by the RLA, extended in 1966 to cover airline labor disputes; Hawaiian; 45 U.S.C. 181.

H. Admiralty [TOC]

Federal courts maintain exclusive jurisdiction over admiralty and maritime transactions; 28 U.S.C. 1333; Stolt-Nielsen S.A. v. Celanese AG, 430 F.3d 567 (2d Cir. 2005). Arbitration clauses in maritime transactions are valid and enforceable under the FAA; 9 U.S.C. 2. "Maritime transaction . . .means charter parties, bills of lading of water carriers, agreements relating to wharfage, supplies furnished to vessels or repairs to vessels, collisions, or any other matters in foreign commerce . . .within admiralty jurisdiction;" 9 U.S.C. 1, 8.

In admiralty, the FAA is inapplicable to "seamen" whether or not they are engaged in "interstate commerce," a requisite for the FAA; Brown v. Nabobs Offshore Corp., 339 F.3d 391 (5th Cir. 2003); 9 U.S.C. 1, 2.

In admiralty, liberal joinder rules allow a plaintiff latitude in naming third parties. An unnamed third party not subject to the arbitration clause between two original parties cannot defeat arbitration by voluntarily joining the litigation; Texaco Exploration & Production Co. v. Am Clyde Engineered Products Co., Inc., 243 F.3d 906 (5th Cir. 2001).

A party who seizes a vessel based upon admiralty law may invoke an arbitration clause enforceable by the court; Fedmet Corp. v. M/V Buyalyk, 194 F.3d 674 (5th Cir.1999).

See, also: Carriage of Goods by Sea Act: 46 U.S.C. 1300. To the extent conflicts exist between the FAA and admiralty arbitration, see, Horak v. Argosy Gaming Co., 648 N.W. 2d 137 (2002).

Note: For a case summarizing the history of admiralty law and "maritime attachments, see, Aqua Stoli Shipping Ltd. v. Gardner Smith Pty. Ltd, 460 F.3d 43 (2d Cir. 1006).

I. International Arbitration [TOC]

Statutes applicable to international arbitration are contained in 9 U.S.C. 201 et seq. and 9 U.S.C. 301 et seq. This subject is beyond the scope of these materials but the relationship between international arbitration and the FAA is discussed in Francisco v. Stolt Achievement Mgmt., 293 F.3d 270 (5th Cir. 2002).

See, generally, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985); Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974); New York Convention law is guided by the FAA whenever not inconsistent with New York law;

J. Appraisals [TOC]

State law defining appraisal as an "arbitration" is conclusive in federal court; Wasyl v. First Boston Corp., 813 F.2d 1579 (9th Cir. 1987). Accord; Hartford Lloyd's Ins. Co. v. Teach Worth, 898 F.2d 1058 (5th Cir. 1990). In Hartford Lloyd's the court concluded an "insurance report" was not an appraisal covered by the FAA.

See,  Fit Tech, Inc. v. Bally Total Fitness Holding Corp., 374 F.3d 1 (1st Cir. 2004).

Cross Reference: California law is in accord and includes appraisals as arbitrations; CCP 1280(a); Chapter IX-A, Appraisals

K. Patents [TOC]

Title 28 U.S.C. 1338 (a) confers exclusive jurisdiction of patent disputes on federal courts. The statute includes patent infringement and patent validity. State courts retain concurrent jurisdiction, i.e., contract actions concerning patents and royalties; Hunter Douglas, Inc., v. Harmonic Design, Inc., 153 F.3d 1318 (Fed. Cir.1998);

Arbitration of patent disputes is governed by 35 U.S.C. 294; Micro Chip Tech., Inc. v. Phillips Corp., 367 F.3d 1350 (Fed. Cir. 2004); Deprenyl Animal Health, Inc. v. University of Toronto, Innovations Foundation., 297 F.3d 1343 (D.C. Cir. 2002).

Cross Reference: Rogers v. Hensley, 194 Cal.App.2d 486 (1961); Tender Loving Things v. Robbins, 2005 WL 902648 (Cal.App.) [Non. Cite.].

L. Copyright [TOC]

Copyright infringement is governed by 28 U.S.C. 1338 (a): ...district courts have original jurisdiction of any civil action . . . relating to patents. .. . copyrights, and trademarks." An action alleging violation of the Copyright Act is subject to arbitration if the parties have signed an arbitration agreement to resolve disputes. Jurisdiction is exclusive under federal law but the issue is complex when contract claims are combined with a copyright claim; Image Software, Inc. v. Reynolds & Reynolds Co., 459 F.3d. 1944 (10th Cir. 2006).

Unlike the statute authorizing arbitration under patent violations (35 U.S.C. 294) no comparable statute exists for copyright violations. In Saturday Evening Post Co. v. Rumbleseat Press, 816 F.2d 1191 (7the Cir. 1987) the court held arbitration of patent violations is permissible under the FAA.

See, Ch. II, Jurisdiction: Federal Court.

M. Bankruptcy [TOC]

A bankruptcy petition automatically stops proceedings; 11 U.S.C. 362 (a).

At least as to "non core" disputes, bankruptcy proceedings in the Fifth Circuit are arbitrable; In re Gandy, 299 F.3d 489 (5th Cir. 2002); In re Crysen/Montenay Energy Co., 226 F.3d 160 (2d Cir. 2000). The Third Circuit denied any distinction between these two categories and applied the FAA to either core or non-core proceedings: In re Mintze, 434 F.3d 222 (3d Cir. 2006) [Chapter 13]; MBNA America Bank, N.A. v. Hill, 436 F.3d 104 (2d Cir. 2006).

Note:  The distinction between core and non-core proceedings in discussed in In re Electric Machinery Enterprises, 479 F.3d 791 (11th Cir. 2007).

In Acands, Inc. v. Travelers Casualty & Ins. Co., 435 F.3d 252 (3d Cir. 2006) [cert. denied] the court vacated an arbitration award rendered prior to filing of a bankruptcy petition on grounds that the automatic stay (11 U.S.C. 362 (a) prohibited any proceeding diminishing the bankrupt's estate.

N. Trade or Industry Arbitration [TOC]

Note: The cases cited below referencing  securities industry members have merged into a single organization  entitled Financial Industry Regulatory Authority (FINRA),e.g. NASD and NYSE are now consolidated.  For an extensive discussion of the securities industry as discussed in a state court case, see Valentine Capital Asset Management, Inc. v. Agahi, 174 Cal.App.4th 606 (2009)  

Several industries and trades have established private panels of experienced personnel to resolve disputes; See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) [Securities Dealers]; Perpetual Securities, Inc. v. Tang, 290 F.3d 132 (2nd Cir. 2002) [NASD]; Belom v. National Futures Assn., 284 F.3d 795 (7th Cir. 2002) [futures];Wellman v. WGA, West, Inc.,146 F.3d 666 (9th Cir.1998) [Writers Guild]); The Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308 (6th Cir.1998) [National Grain & Feed Association]; Line Drivers, Pickup & Delivery v. Roadway Express, Inc., 152 F.3d 1098 (9th Cir.1998) ["industrial common law"]. Although few cases in this category are appealed (except NASD), these arbitrations are judicially reviewed under the same standards as any commercial contract; The Andersons, Inc., supra.

See, Jacobs v. CBS Broadcasting ,Inc., 291 F.3d 1173 (9th Cir. 2002) [collateral estoppel].

Self Regulatory Organizations (SLOs) such as the New York Stock Exchange (NYSE) and the National Association of Securities Dealers, Inc.(NASD) provide arbitration panels to resolve disputes between brokers and customers under the auspices of the FAA or their own individual local rules. Interpretation of NASD rules and the finality of the arbitrator’s decisions are questions of law; Peo. v. Lockyer Shamrock Foods Co., 24 Cal.4th 415 (2000). To the extent California courts rely on SEC’s interpretation of the rules, they give deference to the agency’s interpretation; Krull v. S.E.C., 248 F.3d 907 (9th Cir. 2001).

NASD is a private organization and does not constitute "state action" for Constitutional purposes; Perpetual Securities, Inc. v. Tang, 290 F.3d 132;  FDIC v. Air Florida System, Inc., 822 F.2d 833 (9th Cir. 1987)

Note: In Credit Suisse First Boston Corp. v. Grunwald, 400 F.3d 1119 (9th Cir. 2005) the Ninth Circuit held that California ethical standards for arbitrator disclosure statutes (CCP 1281.9) are pre empted in federal court.

Cross Reference: The California rule on preemption of ethical standards for NASD arbitrations in State court is the same as the Credit Suisse rule. Only the rationale differs; Jevne v. Sup.Ct., 35 Cal.th 935 (2005). See, also, Brown v. Wells Fargo Bank, N.A., 168 Cal.App.4th 938 (2008).

Cross Reference: Part II, Ch. IX-O: Self Regulating Organizations

O. Public (Governmental) Arbitration [TOC]

Federal administrative agencies have adopted ADR programs to resolve disputes: 5 U. S. C. 571; Merit System Protection Bd., 5 U.S.C. 7121 (f); 7701.

P. ERISA [TOC]

The Employment Retirement Income Security Act (ERISA; 29 U.S.C. 1001) preempts State retirement law, and the statute provides an arbitration format comparable to arbitration for claims arising under the statute. FAA rules will apply but an arbitration service provider Rule may supplement the procedure; Kergosian v. Ocean Energy Corp., Inc., 390 F.3d 346 (5th Cir. 2004). Federal law is invoked under the FAA but labor law is frequently applied; Kergosian (f.n.2).

Q. Motor Vehicle Franchise Act [TOC]

This statute, 15 U.S.C. 1226 and subsection (a)(2) . . . "applies only to motor vehicle franchise contracts, as defined in the statute, and does not affect arbitration agreements in other types of contracts, even if they touch the relationship" between a car dealer and a manufacturer; " Arciniaga v. General Motors Corp., 460 F.3d 231 (2d Cir. 2006). The statute, amended in 2002, provides that in a controversy arising thereunder, arbitration can take place only after the dispute arises and all parties consent in writing to arbitrate: “binding arbitration to resolve disputesd involving a motor vehicle franchise contract is entered into only after voluntary agreement by the parties;” Volkswagen of America v. Sud’s of Peoria, 474 F.3d 966 (7th Cir.2007).

R. Receivers [TOC]

In Liberte Cap.Grp. LLC v. Cadwill, 2007 WL 2733335 (6th Cir.) [Non.Pub.] the court held that claims of the receivership estate is not encompassed by an arbitration clause contained in an underlying contract other than for those incurred prior to esablishement of the estate.

 

Chapter II. Jurisdiction: Federal Court [TOC]

Introduction

Jurisdiction is an indispensable condition precedent for all trial and appellate courts whether in litigation or arbitration. The topic is extremely broad and case law resolving jurisdictional issues is extensive. The materials in this Section focus only on jurisdictional issues in arbitration, although litigation decisional law is relevant and briefly discussed.

Because counsel can remove litigation between diverse parties from state to federal court (28 U.S.C. 1332 [a]) jurisdictional tension arises as a consequence of federalism and impacts arbitration as well as litigation. Not only must a federal court resolve basic issues of diversity jurisdiction, the trial judge must determine whether to abstain in favor of the State court arbitration, issue a writ to prevent further parallel state court action, or enjoin the state court from proceeding. In addition, the Federal court may confront the effect of collateral estoppel or res judicata emanating from a state court order or judgment confirming an award, or consider potential application of the Full Faith and Credit doctrine.

Further complicating the jurisdictional issue is the presence of arbitrable and non arbitrable claims in a contractual arbitration clause. In cases removed from state court on diversity grounds, a federal court can retain all claims under the authority of its supplemenal jurisdiction, ordering arbitrable claims to arbitration and staying litigation of non-arbitrable claims, or can remand non-arbitrable claims to state court. In some cases, not all parties in a contract are subject to arbitration, consequently, the mix of claims and parties can cause considerable confusion.

Counsel have also asked federal courts to intervene in reviewing or modifying state court judgments confirming arbitration awards or overruling state court interlocutory orders. The United States Supreme Court has ruled that intermediate federal courts, absent federal statutory authority, lack jurisdiction to review state court proceedings at the trial or appellate level. Only the Supreme Court has jurisdiction to review state court judgments. Known as the Rooker-Feldman doctrine (citations omitted; See, Abstention, this Chapter), these two cases continue to emerge and delay the arbitration process.

A. Subject Matter Jurisdiction [TOC]

1. Federal Question [TOC]

As a general and familiar rule in litigation, Federal courts must have personal and subject matter jurisdiction over parties; Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574 (1999); Shute v. Carnival Cruise Lines, 897 F.2d 377 (9th Cir. 1990). Jurisdiction is the threshold issue for Article III courts and "[f]ederal courts have an independent obligation to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party . .;” Arbaugh v. Y & H Corp., 546 U.S.500 (2006); Tuck v. Pan. AM. Health Org., 668 F.2d 547 (D.C.Cir. 1981).

The United States Supreme Court held in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983) that in the absence of a specific statutory grant of jurisdiction, express preemption, or diversity of the parties, the FAA does not confer subject matter jurisdiction on federal courts to initiate arbitration pursuant to Article III of the U.S. Constitution (28 U.S.C. 1331) requiring a "federal question"; Constitutional issues; or treaties) despite an underlying transaction involving federal law; Circuit City Stores v. Adams, 532 U.S. 105 (2001); Perpetual Securities, Inc. v.Tang, 290 F.3d 132 (2d Cir. 2002); Greenberg v. Bear Stearns Co., 220 F.3d 22 (2d Cir. 2000); Whiteside v. Teltech Corp., 940 F.2d 99 (4th Cir. 1991). Contra, Community State Bank  v. Strong, 485 F.3d 597 (11th Cir. 2007)

Note: Jurisdiction and Venue are often confusing. See, Venue, Ch. III-B-9.

“[The] mere presence of a federal issue in a state ccause of action does not automatically confer federal-question jurisdiction…” Merrel Dow. Phar., Inc. v. Thompson, 478 U.S. 804 (1986).   Absent a Complaint in federal court filed by the plaintiff, no federal subject matter jurisdiction necessarily exists under the FAA to initiate arbitration despite pleading a Federal statute or a State court cause of action; Wander v. Kaus, 304 F.3d 856 (9th Cir. 2002). A petition to compel arbitration must be initiated in state court unless some other basis for Federal jurisdiction exists, i.e., diversity of citizenship, (U.S.C. 1332), a legally cognizable "federal question" (28 U.S.C. 1331, or a claim in admiralty; Greenberg, 220 F.3d 22.

See: Aetna Health, Inc. v. Davila, 542 U.S. 200 (2004).

The Supreme Court held that the FAA creates no new rights and only enforces arbitration agreements; Dean Witter Reynolds v. Byrd, 470 U.S. 213, 220, f.n. 7 (1985). As succinctly stated in Drexel Burnham Lambert, Inc. v. Bock, 696 F. Supp. 957: "Under the well-pleaded complaint rule, a suit does not come within federal question jurisdiction unless a proper statement of the relief sought would necessarily include reference to federally created rights. Because the Supreme Court has found that the right to compel arbitration under the FAA is not one of the federally created rights that gives rise to federal question jurisdiction, the necessary reference to the [FAA] does not bring the suit into federal court;" Aetna Health v. Davila, 542 U.S. 200 (2004).

v. Discover Bank, 129 S.Ct. 1262 (2009) [reversing Discover Bank v. Vaden, 489 F.3d 594 (4th Cir. 2005)] authorizes a federal court to “look through” the pleadings to determine jurisdiction, i.e. whether the claim “arises under” federal law; FAA; 9 U.S.C. 4. A cross claim, regardless of its federal or state nature, may not be considered in determining jurisdiction.  In Caterpillar, Inc. v. Williams, 482 U. S. 386 (1987) the well-pleaded complaint doctrine is also discussed. Its jurisdictional rule is applicable despite a defense to a cause of action pleading violation of a Federal statute (other than the FAA); Wayne v. DHL Worldwide Express, 294 F.3d 1179 (9th Cir. 2002); Community State Bank  v. Strong, 485 F.3d 597 (11th Cir. 2007); Westmoreland Cap. Corp. v. Fidlay, 100 F.3d 263 (2d Cir.1996). The Ninth Circuit has not specifically decided the issue; Blue Cross of Cal. v. Anasthesia Care Assocs. Med. Grp., Inc., 187 F.3d 1045 (9th Cir. 1999).

Practice: Vaden summarizes federal jurisdiction and should be considered before filing a complaint or cross complaint.

One exception exists:  Preemption, either “express,” “complete/field” or “conflict.” The latter applies when it is impossible to comply with state and federal law, or when state law stands as an  obstacle to achieve  the objectives of federal law; Wisconsin Public Intervenor v. Mortier, 501 U.S. 597 (1991).  Unlike “complete” preemption, issues of “conflict preemption” and state law conflicting with federal law are not subject to removal; Community Bank.

In addition, a statute conferring exclusive Federal jurisdiction for a certain class of claims does not necessarily mandate initial filing in federal court. Congressional selection of a federal judicial forum is not a basis for precluding arbitration of federal claims in state court unless Congress has expressly forbidden it (Walton v. Rose Mobile Homes, LLC, 298 F.3d 470 [5th Cir. 2002]) or Congress has expressly conferred exclusive jurisdiction on federal courts; Wayne v. DHL.

It is important to distinguish between jurisdictional issues in filing a petition to compel arbitration (9 U.S.C. 4) and the jurisdictional issues in moving to vacate or correct an arbitration award (9 U.S.C.10 & 11). Neither 9 U.S.C. 3 & 4 nor U.S.C. 10 & 11 provide an independent grant of jurisdiction; Baltin v. Alaron Trading Corp., 128 F.3d 1466 (11th Cir. 1997).

A petition to vacate or correct an award is a separate action; Cortez Byrd Chips v. Bill Harbert Const. Co., 529 U.S. 193 (2002). For that reason, a diversity party meeting minimum monetary limits can file in federal court urging a "federal question" that the arbitrator "manifestly disregarded" the law as a ground for appeal despite an arbitration award confirmed by a judgment in a state court; Greenberg v. Bear Stearns Co., 220 F.3d 22 (2d Cir. 2000).

In the absence of litigation on file, a party seeking to enforce an arbitration clause in a contract (“free standing”) may serve another party with notice to arbitrate if both (or all) have agreed on an arbitrator or arbitration service organization (self-executing clause) in their pre-dispute agreement. If the opposing party responds by filing an injunction to prohibit the arbitration, or a motion for declaratory relief, it must do so in state court, absent diversity. If diversity jurisdiction exists, the party seeking the injunction or declaratory relief (28 U.S.C. 2201) may file in federal court; America's Moneyline, Inc. v. Coleman, 360 F.3d 782 (7th Cir. 2004); Cigna Healthcare of St. Louis, Inc. v. Kaiser, 294 F.3d 849 (7th Cir. 2002).

The Ninth Circuit, in discussing the difference between different kinds of injunctive relief, requires the moving party to satisfy the conventional requirements for issuance of an injunction; Textile Unlimited, Inc. v. A..BMH and Co., Inc., 240 F. 3d 781 (9th Cir. 2001).

See: Simula, Inc. v. Autoliv, Inc., 175 F.3d 716 (9th Cir. 1999).

Note: Res judicata may apply to subject matter jurisdiction (diversity); Unity Communications, Inc. v. Unity Communications of Colorado, LLC, 105 Fed.Appx. 546 (5th Cir. 2004).

See, Res Judicata, Ch. IV-J,  infra.

Comment:  Community State Bank cites a case deciding an important issue of the overlap between subject matter jurisdiction and diversity jurisdiction.  In First Franklin Financial Corp. v. McCollulm, 144 F.3d 1362, (11th Cir. 1998) the plaintiff sued the bank and its employee-a citizen of the same state-destroying diversity.  The Bank filed an independent action in federal court to compel arbitration of plaintiff’s claim. Although diversity jurisdiction was lacking in the state court action, subject matter jurisdiction in federal court exists under 9 U.S.C. 4. The price of federalism.
For a similar case, See Cigna Healthcare of St. Louis, above.

2. Constitutional Jurisdiction: Case or Controversy  [TOC]

Confusion also exists between Article III Constitutional standing with "standing " required to compel arbitration. Article III requires a "case or controversy", i.e., a plaintiff must allege an injury in fact reasonably related to the actions of the defendant and redressable by a favorable decision; Bennett v. Spear, 520 U.S. 154 (1997); Bank of Nova Scotia v. Suitt Construction Co., 2006 WL 3804579 (Not. Pub.).

Contractual standing is a contract based defense by an authorized party that an arbitration clause mandates arbitration rather than litigation; Lloyd v. Hovensa, L.L.C., 369 F.3d 263 (3d Cir. 2004). Contractual "standing" also arises in the context of third party beneficiaries or non signatories attempting to enforce an arbitration clause against a signatory. See: Ch. IV-D; Standing.

Private arbitration panels are not federal courts jurisdictionally requiring a “case or controversy”, and serve to provide a dispute resolution alternative instituted between the parties.  Arbitration is an alternative to litigation and arbitration panels can resolve disputes that a federal court would dismiss; Klay, M.D. v. United Healthgroup, Inc., 376 F.3d 1092 (11th Cir. 2004).  Arbitration is not “state action; Perpetual  Securities v. Tang, 290 F.3d 132 (2d Cir. 2002) [NASD]; FDIC v. Air Florida System, Inc., 822 F.2d 833 (9th Cir. 1987);

Cross Reference: Standing: Part II; Ch. XV-B-2

3. Labor Arbitration: Labor Management Relations Act [LMRA]) [TOC]

Federal courts share concurrent jurisdiction with the National Labor Relations Board (NLRB), an administrative agency statutorily authorized by the Labor Management Relations Act (LMRA; 29 U.S.C. 301 (a); 151 et seq.). The Ninth Circuit distinguishes resolving jurisdictional issues by determining whether the dispute is contractual (NLRB) or representational (federal court); S.E.I.U. v. St. Vincent Med. Ctr., 344 F.3d 977 (9th Cir. 2003). The LMRA confers jurisdiction on federal court to resolve disputes alleging violation of the contract between employer and employee, but the National Labor Relations Act preempts representational disputes; San Diego Bldg. Trades Council v. Garmon, 359 U.S. 236 (1959); Int. Brotherhood of Electrical Workers, Local 71 v. Trafftech, Inc., 461 F.3d 690 (6th Cir. 2006).

The LMRA also preempts conflicting state labor law, but LMRA preemption of state labor law should be distinguished from federal preemption of state arbitration law. California law specifically permits arbitration of public employment disputes; CCP 1280. Preemption of state causes of action in labor law is a source of considerable litigation locally and nationally; Humble v. Boeing Co., 305 F.3d 1004 (9th Cir. 2002); Meyer v. Schnucks Markets, Inc., 163 F.3d 1048 (8th Cir. 1998); Beals v. Kiewit Pac. Co., Inc., 114 F.3d 892 (9th Cir.1999). The jurisdictional morass is illustrated by Adams v. Pac. Bell Directory, 111 Cal.App.4th 93 (2003).

Employees who belong to a union and work under the terms of a Collective Bargaining Agreement (CBA) may nevertheless file statutory tort/ contract causes of action not included in the labor agreement despite an adverse grievance decision; Wright v. Universal Maritime Service Corp., 525 U.S. 70 (1998); Eastern Associated Coal Corp. v. Massey, 373 F.3d 530 (4th Cir. 2004). But a clause in a CBA precluding initiation of arbitration in the event of pending litigation or administrative action is enforceable; New England Health Care Employees Union v. Rhode Island Legal Services, 273 F.3d 425 (1st Cir. 2001).

The jurisdictional base for CBAs is the LMRA (29 U.S.C.151) and the Ninth Circuit has held the FAA inapplicable to CBAs; Poweragent, Inc. v. Electronic Data Systems Corp., 358 F.3d 1187 (9th Cir. 2003).

Cross Reference: California Courts have also confronted the preemption issue; Deschene v. Pinole Point Steele Co., 76 Cal.App.4th 33 (1999).

4. International Arbitration [TOC]

International arbitration is governed by 9 U.S.C. 201 et seq. and its statutory interpretation is beyond the scope of these materials.

See, Convention on Recognition and Enforcement of Foreign Arbitration Awards; 9 U.S.C. 201; Pike v. Freeman, 266 F.3d 78 (2d Cir. 2001).

Note:  California statutory authority for international arbitration is CCP 1297.11. See, also Gueyffier v. Ann Summers, Ltd. 144 Cal.App.4th 166 (2006). The Califonia Supreme Court reversed this decision but it contains research materials for use by counsel; Gueyffier v. Ann Summers, Ltd., 43 Cal.4th 1179 (2008).

B. Diversity Jurisdiction [TOC]

Removal of state action to federal court under the FAA is authorized by 28 U.S.C. 1441;1446(a) if specific statutory requirements of 28 U.S.C. 1331/1332 (diversity jurisdiction) and federal case law are met. Removal requires the District Court to have original subject matter jurisdiction, i.e. diversity of citizenship of the parties, pursuant to 28 U.S.C. 1332. Distinguish diversity jurisdiction from derivative jurisdiction (28 U.S.C. 1441).

Practice Point: Appearance in Federal court can arise in several ways:

1) Litigation filed in State court: removal of litigation from state court on grounds the parties are diverse;

2) Litigation filed in Federal court: declaratory relief or summary judgment challenging litigation and petitioning for arbitration filed initially in Federal court if diversity jurisdiction exists. U.S.C. 2201 (Declaratory Judgment Act) does not provide for its own subject matter jurisdiction); Vaden v. Discover Bank, 129 S.Ct. 1262 (2009); Advance America Servicing of Arkansas, Inc. v. McGinnis, 526 F.3d 1170 (8th Cir. 2008).

Practice: Advance America warns counsel who file declaratory relief or summary judgment in a federally filed cause of action that the amount in controversy is based on the petition to compel arbitration -which in some cases (class actions) is very small and insufficient to warrant diversity jurisdiction requirements of $75,000. In Advance America the plaintiff filed an action in state court and the defendant filed in federal court alleging jurisdiction based on the amount alleged in plaintiff’s complaint exceeded $75,000.00.      

3) No litigation on file: Assuming grounds for diversity exist, motions for declaratory relief are filed despite the absence of litigation on file and one party demands arbitration and the other refuses or neglects to participate.

4) Enjoining a party from seeking arbitration:

In each case the statutory $75,000.00 minimum as alleged in the Complaint must be met under whatever theory a court imposes; 28 U.S.C. 1332 (a). An arbitration clause capping liability for injury or harm at less than $16,000 does not defeat jurisdiction;  Geographic Expeditions, Inc. v. Estate of Lhotka, ex rel Lhotka, 599 F.3d 1102 (9th Cir.2010).

Note: Diversity jurisdiction in arbitration is muddled by Supreme Court jurisprudence that the FAA does not provide independent subject matter jurisdiction in federal court; Southland Corp. v. Keating, 465 U.S. 1; Moses H. Cone Mem. Hosp. v. Mercury Construction Co., 460 U.S.1 (1983).  The problem is illustrated when the plaintiff files litigation in state court against two or more defendants, one of whom is not diverse and  thereby defeating federal jurisdiction. One of the defendants files an independent action (declaratory relief or summary judgment) in federal court seeking arbitration only of the diverse party plaintiff.  (The defendant in federal court alleges plaintiff added a non-diverse party only to defeat diversity.).
Thus a defendant in litigation with plaintiff who has named multiple defendants can select a diverse party, ingore a non-diverse party, and file declaratory relief in federal court seeking arbitration.

Reference:  Ch. II-C

C. Diversity Rules [TOC]

1. Joinder of Moving Parties [TOC]

All parties must join in the request for removal under 28 U.S.C. 1446 ("complete diversity") and fraudulent joinder will defeat diversity; United Computer Systems, Inc. v. AT & T Corp., 298 F.3d 756 (9th Cir. 2002). Diversity is determined by reference to the dispute between parties in the litigation-not the arbitration clause- at the time the Complaint is filed and removal effected; Doctor's Associates, Inc. v. Hamilton, 150 F.3d 157 (2d Cir. 1998); Strotek Corp. v. Air Transport Assn. of America, et al., 300 F.3d 1129 (9th Cir. 2002); Reddam v. KPMG, 457 F.3d 1054 (9th Cir. @006).

2. Amount in Controversy [TOC]

For Federal jurisdiction, the damages sought by each plaintiff must exceed $75,000.00 (28 U.S.C. 1332[a]) based on the Complaint, or other documentary evidence in the record (Valdez v. All State Ins. Co., 372 F.3d 1115 (9th Cir. 2004), and the moving party bears the burden of proof that each claim exceeds the jurisdictional amount; Zahn v. International Paper Co., 414 U.S. 291 (1973); St. Paul Mercury Indemnity Co. v. Red Cab, 303 U.S. 283 (1938); Meira v. Dairyland Ins. Co., 143 F. 3d 1337 (10th Cir.1998); Daniels v. Philip Morris, 18 F.Supp. 2d 1110 (1998).

Monetary jurisdiction for class actions  is $5,000,000;  28 U.S.C. 1332(d) (2).

The amount in controversy is determined "from the perspective of the plaintiff, with a focus on the economic value of the rights he seeks to protect;" Hunt v. Wash. St. Apple Advertising Comm., 432 U.S. 333 (1977); Pa. R.R. Co. v. City of Gerard, 210 F.2d 437 (6th Cir. 1954).

Courts have formulated various tests: the amount in controversy is determined by damages requested in the Plaintiff's underlying state court suit; Doctor's Associates, Inc. v. Hamilton, 150 F.3d 157 (2d Cir. 1998) the "stakes" in the arbitration are the test, not the cost of litigation; America's Money line, Inc. v. Coleman, 360 F.3d 783 (7th Cir. 2004); "Pecuniary consequences" is the test in a declaratory relief or injunctive cause of action; Richard C. Young & Co. Ltd v. Leventhal, 389 F.3d (1st Cir. 2004).

Exxon Mobil Corp. v. Allapattah Services, Inc., 543 U.S. 546 (2005) permits the District Court to exercise supplemental jurisdiction of plaintiffs who lack the $75,000.00 limit if only one plaintiff qualifies; 28 U.S.C. 1332; 1367.

Note: The early statutory history of 28 U.S.C.1332 is reviewed in St. Paul Mercury Indemnity Co., supra.

It is important to distinguish between the minimum jurisdictional amount of $75,000.00 required to remove a case from state to federal court and the same amount required under a petition to vacate an award pursuant to 9 U.S.C. 10 (a)(1-4). A petition to vacate an award involving diverse parties is a separate action (Cortez Byrd Chips, Inc. v. Bill Harbert Const. Co., 529 U.S. 193 [2000]; Green Tree Financial Corp-Ala. v. Randolph, 531 U.S. 79 [2000]),"The vacatur proceeding (motion to vacate an award) must stand on its own jurisdictional feet;" Smith v. Rush-Retail Centers, Inc., 360 F.3d 504 (5th Cir. 2004); U.S.A. v. American Society of Composers, Authors and Publishers, 32 F.3d 727 (2d Cir. 1994) [no jurisdiction].

The amount of the award determines monetary jurisdiction; Theis Research, Inc. v. Brown & Bain, 386 F.3d 1180 (9th Cir. 2004); Vulcan Chemical Technologies, Inc. v. Barker, 297 F.3d 332 (4th Cir. 2002).

3. Non-Parties [TOC]

A non-diverse party not before the court cannot defeat diversity jurisdiction; Circuit City Stores, Inc. v. Najd, 294 F.3d 1104 (9th Cir. 2002).

4. Corporate Status [TOC]

If "diversity" of jurisdiction is in issue, the party seeking removal has the burden of proof to establish a corporate entity is not subject to state jurisdiction based upon the locus of incorporation or principle place of business; United Computer Systems, Inc. v. AT & T Corp., 107 Fed.Appx. 818; Nauru Phosphate Royalties, Inc. v. Drago Daic Interests, Inc., 138 F.3d 160 (5th Cir. 1998).

A business entity is "located," for diversity jurisdiction purposes, in the state designated in its articles of association as the locus of its main office; Wachovia Bank v. Schmidt, 546 U.S. 303 (2006).

5. Removal & Remand [TOC]

When a notice of removal is filed and served on all parties, the state court loses jurisdiction; 28 U.S.C. 1446(d); Peo. v. Bhakta, 135 Cal.App.4th 631 (2006); Resolution Trust Corp. v. Bayside Developers, 43 F.3d 1230 (9th Cir.1994). With a limited exception for civil rights actions, no appeal lies from a remand order from the federal court; 28 U.S.C. 1443 (1); 28 U.S.C. 1447(d).  The moving party must file a notice of removal within  30 days of  ascertaining the case is  subject to removal.  That the moving party received notice of the amount in a letter requesting mediation is not subject to California mediation privilege (Ev.Code 1119) precluding this evidence; Babasa v. Lenscrafters, Inc., 498 F.3d 972 ((9th Cir. 2007).

Cross Reference: In Clement v. Kaiser Health Plan, Inc., 2006 WL 177425 (Cal.App.) [Non.Cite.], counsel filed three separate actions in state court against Kaiser and two individual defendants. In an amended Complaint against Kaiser, plaintiff added an additional defendant who removed the action. The state court consolidated all cases, ordered them into arbitration and an award subsequently issued prior to arbitration. The federal court remanded Kaiser, a non appealable order, re attaching jurisdiction in state court. Clement reversed the Kaiser award on grounds the state court had lost jurisdiction.

D. Supplemental Jurisdiction [TOC]

Federal courts can exercise supplemental jurisdiction (28 U.S.C. 1367) over state claims when litigation is removed to federal court but not if inconsistent with diversity jurisdiction; Mattel, Inc. v. Bryant, 446 F.3d 1011; Daniels v. Philip Morris Cos., 18 F.Supp.2d 1110; 28 U.S.C. 1332.

See, Lippitt v. Raymond James Fin. Services, Inc., 340 F.3d 1033 (9th Cir. 2003) reviewing the subject of diversity in the context of litigation and summarizing the law.

See, Amount in Controversy, this Section,  C-2.

E. Collateral Jurisdiction: Federal & State [TOC]

1. Arbitrable and Non-Arbitrable Claims [TOC]

Collateral jurisdiction refers to cases involving parallel litigation with either the same parties or third parties in state and federal courts. For example, in Moses H. Cone Mem. Hosp. v. Mercury Const. Co, 460 U.S. 1 (1983) a party had contracts with two other parties for the same project. One party had signed a contract containing an arbitration clause but the other party had no arbitration clause in its contract. A dispute arose

between the three parties and plaintiff filed suit in state court against both defendants. The defendants removed the state court action to federal court but, lacking jurisdiction over the party who had not signed an arbitration clause, the judge remanded to state court. Result: one party proceeded in federal court; the other in state court.

Note: Concurrent jurisdiction, as distinct from collateral jurisdiction, exists when state and federal courts have original jurisdiction to hear federal and state claims.

In some cases, not all claims in Federal court are subject to arbitration. The court may order arbitrable claims to arbitration, stay non arbitrable litigation pending resolution of arbitrable claims, or remand claims not subject to arbitration to the state court; Metropolitan Life v. Lockette, 155 F.3d 1339 (11th Cir. 1998); 28 U.S.C. 1367 (state claims subject to federal court pendant jurisdiction). Supplemental jurisdiction is distinguished from ancillary jurisdiction; Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985); Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375 (1994).

Unlike the California statute allowing the trial court considerable latitude in allocating judicial power to consolidate claims; or ordering priority between arbitration and litigation; or denying enforcement of an arbitration clause (Cronus Investments, Inc., v. Concierge Services, 35 Cal.4th 376 (2005);CCP 1281.2 [c]); or severing issues (CCP 1281.4), the FAA contains no comparable statute; Sovak v. Chugai, 289 F.3d 615 (9th Cir. 2002). In Security Ins. of Hartford v. TIG Ins. Co., 360 F.3d 322 (2d Cir. 2004) the Second Circuit reviewed a California statute, CCP 1281.2 (c)(4), authorizing a court to stay arbitration if a collateral action is pending. The court concluded the statute was procedural, not substantive and therefore not preempted by the FAA; Accord, Palcko v. Airborne Express, Inc., 372 F.3d 588 (3d Cir. 2004).

Cross Reference: Under California law, the court can consolidate, sever and stay an arbitration, multiple arbitrations and litigation; Cronus; CCP 1281.2. In Sanders v. Kinko's, Inc., 99 Cal.App.4th 1106 (2002) the court held that CCP 1281.2 is applicable in a state court arbitration despite a clause in the contract applying FAA rules in the context of class action filings.

The Supreme Court acknowledges that "piecemeal" litigation may occur for arbitrable and non arbitrable terms in an agreement but, according to the Court, Federal courts can employ various preclusive doctrines to insure federal claims are enforced; Dean Witter Reynolds v. Byrd, 470 U.S. 213 @ 220 (1985); Bank One N.A. v. Boyd, 288 F.3d. 181(5th Cir. 2002). Collateral estoppel and res judicata are options but not exclusive ones.

Note: Distinguish the doctrine of separating arbitrable and non-arbitrable claims from a "severance" of enforceable and unenforceable claims in arbitration clauses, some potentially revocable on grounds of law and equity or waiver; Great Earth Cos. v. Simons, 288 F.3d 878 (6th Cir. 2002) [forum selection clause].

2. Arbitrable and Non-Arbitrable Third Parties [TOC]

The same rule as arbitrable "issues" (above) applies. Notwithstanding the status of other parties to the underlying dispute, i.e., non-signatories or third party beneficiaries unnamed or not included in the arbitration agreement, the court must enforce the agreement. Metropolitan Life v. Lockette, 155 F.3d 1339 (11th Cir. 1998). A signatory to an arbitration agreement may, under some circumstances, compel a non-signatory to join the arbitration. And a non signatory can, under some circumstances, compel joinder to a signatory in a pending arbitration.

See, Signatories and Non Signatories, Ch. IV-F-2, infra.

Note: As noted earlier, the prospect of collateral or parallel proceedings in state and federal court is apparent. Under the FAA, an arbitration agreement must be enforced according to its terms.

3. Joinder of Parties [TOC]

In some cases the plaintiff will file litigation against multiple parties despite the potential for diversity jurisdiction (or intentionally omit a party to avoid removal). The court must determine whether the third party is an "indispensable party" under FRP 19. In Brown v. Pacific Life Ins. Co., 462 F.3d 384 (5th Cir. 2006) the plaintiffs filed originally in state court; the defendants removed to federal court and one of the named defendants in the State court action destroyed diversity jurisdiction. The court in Brown discusses joinder in some detail and comments that actions in State court and the potential for conflicting results is insufficiently prejudicial to render a party indispensable under Rule 19.

Note: The subject of joinder of "indispensable parties", diversity jurisdiction (Ch. II-B and F) and abstention from state court actions are all frequently involved. Also closely aligned is the role of unnamed parties (non-signatories) who seek to join an arbitration among signatories ) Ch. IV-F-2).

4. Mixed Federal & State Claims [TOC]

Federal non-arbitrable claims mixed with state arbitrable claims do not require the District Court to stay the former to await disposition of the latter. The federal court can protect Federal statutory or Constitutional interests by rules of preclusion or collateral estoppel despite the potential for multiple proceedings; Dean Witter Reynolds v. Byrd, 470 U.S. 213 @ 220 (1985).

F. Concurrent Jurisdiction: Federal & State [TOC]

As noted above, if a party files a civil action initially in state court, the opposing party may remove the litigation to Federal court if diversity jurisdiction attaches despite arbitrable and non arbitrable claims; Moses H. Cone Mem. Hosp. v. Mercury Const. Co., 460 U.S. 1 (1983). To avoid duplicate litigation, the logical option is abstention by the federal court to allow the state court to proceed with all causes of action or related claims.

If non arbitrable parties or issues are within some of the state causes of action and not subject to arbitration, the state court under California law could defer litigation, or arbitration, or consolidate/ sever all claims. If the federal court refuses to abstain, retains jurisdiction to resolve the arbitrable claims, and remands non-arbitrable claims, the state court must try the non arbitrable claims. By failing or refusing to abstain, the prospect of inconsistent judgments in each court is apparent.

See, Abstention,  II-F-1

The Supreme Court and Federal Circuit Courts have rejected abstention and will rarely abstain despite the prospect of piecemeal litigation and arbitration; Brown v. Pacific Life Ins. Co., 462 F.3d 384 (5th Cir. 2006 ). To some extent, the problem is alleviated if the federal court exercises supplemental jurisdiction and retains non arbitrable claims. Otherwise the cost to the parties is extensive.

Note: Whether a particular claim is subject to both Federal and State jurisdiction is beyond the scope of these materials. For a summary of conflicting opinions, see, Lou v. Belzberg, 834 F.2d 730 (9th Cir. 1987).

Concurrent jurisdiction is the "price of federalism. . . [where] state and federal courts have concurrent jurisdiction simultaneously pursuing claims in both courts;" Great Earth Cos. v. Simons, 288 F.3d 878 (6th Cir. 2002); Atlantic C.L.R. Co. v. Brotherhood of Locomotive Engineers, 398 U.S. 281 (1970); Brown. Federal courts need not abstain, but in some cases can defer to state courts; Rowe v. Emison, 507 U.S. 25 (1993) [not an arbitration case].

See, for an extensive discussion of federalism, see Noel v. Hall, 341 F.3d 1148 (9th Cir. 2003).

Comment: Civil actions, not always including arbitration clauses, involve conflicts created by a dual system of courts. The Supreme Court has interpreted these conflicts differently, depending upon statutory language and the scope of federal jurisdiction. The following cases are confined to issues of arbitration.

1. Abstention [TOC]

Introduction

The dual system of Federal and State courts in the United States frequently produces a tension resulting in jurisdictional disputes. The Supremacy Clause of the United States Constitution, as interpreted by the Supreme Court, serves as a doctrine to confer judicial power on federal courts in contexts other than those related to arbitration; Colorado River Water Dist. v. U.S., 424 U.S. 800 (1976); R.R. Commission v. Pullman, 312 U.S. 496 (1941); Buford v. Sun Oil Co., 309 U.S. 315 (1943); Younger v. Harris, 401 U.S. 37 (1971). Accordingly, abstention case law is reviewed here only in the context of arbitration.

See, for an extended discussion of Supreme Court cases: U.S. v. Morros, 268 F.3d 695 (9th Cir. 2001).

The tension between the two jurisdictions arises when a plaintiff initiates litigation in state court and the defendant removes to federal court; or, the defendant files a separate action in federal court, files a petition to compel arbitration and names a diverse party who may not be named in the state court. Parallel litigation would suggest the federal court abstain and allow the state court to proceed. Federal courts repeatedly refuse to abstain, causing the potential for conflicting decisions.

See, for an example of a jurisdictional nightmare, Brown v. Pacific Life Ins. Co., 462 F.3d 384 (5th Cir. 2006).

Note: In determining whether to abstain, American Guarantee & Liability Ins. Co. v. Anco Insulations, Inc., 406 F.3d 408 (5th Cir. 2005) explains the procedural distinction between a motion for declaratory relief and a motion seeking money damages or equitable relief. In a motion for declaratory relief to resolve language in an arbitration clause, the standard of review may be the same as in litigation. American Guarantee is not an FAA issue but relevant to pleadings in general.

Or, in Myer v. Americo, 469 F.3d 731 (8th Cir. 2006) the prevailing party in arbitration moved to confirm an award in state court and the non prevailing party moved to vacate in District Court. The court abstained on grounds res judicata bound the federal court.

Because the FAA does not confer independent jurisdiction on Federal courts, a case filed in state court but removed under diversity jurisdiction (28 U.S.C. 1331/2; 1441) remains viable in state court. Once the Federal court accepts removal, jurisdiction with the State court becomes concurrent, or parallel, albeit moot in some cases.

As a general rule, the Federal court will not cede jurisdiction in concurrent filings to  state courts despite identical subject matter-unless there is some basis for abstention, or, "exceptional circumstances" exist; Moses H. Cone Mem. Hosp. v. Mercury Const. Co, 460 U.S. 1 (1983); Colorado River Water Dist. v. U.S., 424 U.S. 800 (1976). "The decision whether to dismiss a federal action because of parallel state court litigation does not rest on a mechanical checklist, but on a careful balancing of the important factors as they apply in a given case, with the balance heavily weighted in favor of the exercise of jurisdiction in determining whether to abstain;" Moses H. Cone, @16; Bank One, N.A. v. Boyd, 288 F.3d 181 (5th Cir.2002). The federal court must consider the following factors:

Inconvenience of the federal forum;

Desirability of avoiding piecemeal litigation;

The order in which jurisdiction was obtained in the concurrent forums;

Adequacy of state proceedings in protecting the rights of the party invoking federal jurisdiction; Paine Webber, Inc. v. Cohen, 276 F.3d 197 (6th Cir. 2001); TranSouth-Financial Corp. v. Bell, 149 F.3d 1292 (11th Cir. 1998).

Duplicate litigation in both jurisdictions alone does not warrant abstention; Brown v. Pacific Life Ins. Co., 462 F.3d 384 (5th Cir. 2006); Great Earth Cos. v. Simons, 288 F.3d 878 (6th Cir. 2002); Black Sea Investment, LTD. v. United Heritage Corp., 204 F.3d 647 (5th Cir. 2000). Nevertheless, in Vulcan Chemical Techs., Inc. v. Barker, 297 F.3d 332 (4th Cir. 2002) the court allowed a party to file a motion to vacate an award (9 U.S.C. 10) subsequent to a California state court confirmation of the award. Abstention should have been appropriate, and permitting a separate proceeding in federal court to vacate after a state court has confirmed an award is a costly exercise in federalism.

In ruling on any objection to arbitration, and in determining whether to abstain, the Federal court decides whether to send the action to arbitration or allow it to remain in litigation. The court may need to determine whether a second, or subsequent, petition to compel arbitration is viable even if that litigation was filed in state court. The potential for res judicata in state court proceedings obviously exists; Whiteside v. Teltech Corp., 940 F.2d 99 (4th Cir. 1991).

Note: Whiteside is an example of jurisdiction "gone wild". The parties had arbitrated their dispute originally in federal court and a judgment confirmed the award. The losing party then filed an action in state court allegedly on different grounds than the first arbitration. On removal, the District Court abstained on grounds the issues had already been resolved, or should have been resolved, in the earlier federal court proceeding. The Fourth Circuit ordered the trial court to hear the petition.

As an exception to the general rule, abstention is appropriate in complex questions of state law affecting policy issues of substantial public concern whose significance goes beyond the result in the case at bar; La. Power & Light Co. v. City of Thibodaux, 360 U.S. 25 (1959). Three types of abstention exist:

For a review of Younger abstention in the context of a non arbitrable action, See, Glbert v. Ferry, 401 F.3d 411 (6th Cir. 2005);

As above, abstention creates a tension between state and federal courts when the latter assumes jurisdiction over the former. In Doctor's Assocs. v. Distajo, 107 F.3d 106 (2d Cir. 1997) the federal court was confronted with a state court default judgment confirming an arbitration award offered as a bar to a subsequently filed motion to compel arbitration in federal court. Doctor's Associates held that the judgment was improperly entered and denied its enforcement.

For a classic case of abstention doctrine, see Cigna HealthCare of St. Louis v. Kaiser, 294 F.3d 849 (7th Cir. 2002). This case is a rare exception to the general rule that federal courts not abstain. The appellate court recommended the District Court stay the motion to compel arbitration pending resolution of a state court decision on enforcement of a similar arbitration clause. The court agreed abstention would tentatively result in a decision whether or not to enforce the state court judgment.

Comment: No federal statute requires federal courts to refuse abstention from state court proceedings. The Supreme Court has ruled the issue is jurisdictional, not statutory, and resolved any conflict in favor of federal jurisdiction. As noted in the next Section, Congress has limited the injunctive power of federal courts in restraining prosecution of state civil actions and presumably could do the same with abstention. Whether this resolution is consistent with the Supremacy Clause of the U.S. Constitution is another issue.

2. Anti-Injunction Act [TOC]

Title 28 U.S.C. 2283 provides: "A court of the United States may not grant an injunction to stay proceedings in a state court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effect its judgments."

The Anti Injunction Act prohibits a federal court from enjoining a state court proceeding unless: 1) express Congressional authorization exists to enjoin state proceedings; 2) an injunction is necessary to protect a judgment rendered by a federal court; 3) an injunction is necessary to aid federal court jurisdiction over an action; Great Earth Cos., Inc. v. Simons, 288 F.3d 878 (6th Cir. 2002); Bank One N.A. v. Boyd, 288 F.3d 181 (5th Cir. 2002); TranSouth Financial Corp. v. Bell, 149 F.3d 1292 (11th Cir. 1992).

Because litigation may initiate in state court, and subsequently removed by one party to federal court, collateral proceedings on the same or similar issues on non arbitrable grounds may proceed simultaneously, or one party files in state court and the other party files in federal court causing a potential conflict in judgments. The Anti-Injunction Act is invoked when litigation has already commenced whereas the doctrine of abstention occurs after pleadings have been filed, a party removes to federal court and files a petition to compel arbitration. But the mere existence of parallel proceedings, in itself, does not warrant a federal court to issue an injunction against a state court under the "necessary in aid of jurisdiction" clause; Lou v. Belzberg, 834 F.2d 730 (9th Cir. 1987)

The Act is narrowly construed and doubts as to its applicability should be resolved in favor of state courts; Zurich American Ins. Co. v. Sup.Ct. for State of Cal., 326 F.3d 816 (7th Cir. 2003); Vendor Co. v. Lector-Vend Corp., 433 U.S. 623 (1977). The test for issuing an injunction are the traditional equitable elements of irreparable harm and no adequate state remedy; Zurich.

Whether the "proceedings" (above) in state court are subject to federal injunction is contingent on the test applied by the United States Supreme Court: "Proceedings: A judicial inquiry [that]. . . investigates, declares and enforces liabilities as they stand on present or past facts and under laws supposed already to exist;" Roundabout v. Harked, 405 U.S. 15 (1972). Arbitration ordered by a state court is a "proceeding", and the Anti-Injunction Act is applicable; Empire Blue Cross & Blue Shield v. Janet Grison’s a Place for Us, 985 F.2d 459 (9th Cir.1993). If the parties voluntarily agree to arbitration without a court order to compel arbitration, the Anti-Injunction Act is inapplicable; Six Clinics Holding Corp., II v. Coxcomb Systems, Inc., 119 F.3d 393 (6th Cir. 1997).

See, Practice following Rooker-Feldman doctrine, this Chapter.

3. All Writs Act [TOC]

The All Writs Act (28 U.S.C. 1651) provides that..." courts established by . . . Congress may issue all writs necessary or appropriate in aid of their respective jurisdiction and agreeable to the usages and principles of law;" Mandamus is also authorized under the Act; Absento Garden, Inc. v. Sup.Ct of Guam, 94 F.3d 1346 (9th Cir.1996). "The All Writs Act . . . gives federal courts broad injunctive powers to protect their own judgments. . . . This power includes the authority to enjoin arbitration to prevent re-litigation;" Kelly v. Merrill Lynch, Inc., et al., 985 F.2d 1067 (11th Cir.1993).

The Eleventh Circuit discussed three types of injunctions, i.e., "traditional", to enforce an underlying cause of action; "statutory", i.e., banning certain conduct or establishing rights; the All Writs Act, i.e., issuing writs to protect jurisdiction already conferred. Traditional rules for ordinary injunctions do not apply to the All Writs Act; Klay, M.D. v. United Healthgroup, Inc., 376 F.3d 1092 (2004).

The All Writs Act does not confer independent jurisdiction on a federal court and removal to federal court under 28 U.S.C. 1441 is not allowed absent an independent basis for removal; (Syngenta Crop Protection, Inc. v. Henson, 537 U.S. 28 [(2002]), but the statute does prevent interference with an order previously issued by a federal court; In re American Honda, 315 F.3d 417 (4th Cir. 2003). In Honda, a party misrepresented facts to an arbitrator who issued an award in favor of that party. The Federal court, in a collateral proceeding, held that the All Writs Act did not prevent the District Court from setting aside the judgment entered on the award.

4. Full Faith & Credit [TOC]

Title 28 U.S.C. 1738, the federal statute implementing the Full Faith and Credit Clause of the U.S. Constitution, Article IV, Sec. 1, permits introduction in evidence of out-of-state judicial proceedings in federal courts and records if properly authenticated. These records .. . "have the same full faith and credit in every court within the United States as they have by law or usage in the courts of [the] State . . . from which they are taken."

Federal courts must accord to state court judgments identical claim preclusion and issue preclusion as would be afforded by a State court; Matsushita Electrical Industrial Co., LTD. v. Epstein, 516 U.S. 367 (1996); Parsons Steel, Inc. v. First Alabama Bank, 474 U.S. 518 (1986). The Full Faith & Credit Act is a close parallel to the Rooker-Feldman doctrine (next Section) and res judicata, infra.

See, Towers, Perrin, Forster & Crosby, Inc. v. Brown, 732 F.2d 345 (3d Cir. 1984); Southeast Resource Recovery Facility Auth. v. Montenay Int. Corp., 973 F.2d 711 (9th Cir. 1992).

Cross Reference: "Congress has specifically required all federal courts to give preclusive effect to state court judgments whenever the courts of the State from which the judgment emerged would do so"; Allen v. McCurry, 449 U.S. 90 (1980). Because California courts do not give preclusive effect to collateral estoppel in all cases, an award confirmed by judgment may necessarily affect subsequent federal litigation; Vandenberg v. Sup.Ct., 21 Cal.4th 815(1999). An award issued by an arbitrator and subsequently confirmed in a judgment is equivalent to a judgment in a civil action; CCP 1287.4.

Note: The twin doctrines of collateral estoppel and res judicata applicable to arbitration awards and judgments in state court to its own legislation or judicial decisions are treated separately. See, Part II, Ch. XVII-D-1,2. infra. These two doctrines are also applicable to prior federal judgments, infra.

Note: In McDonald v. City of West Branch, Mich., 466 U.S. 284 (1984), supra, the Supreme Court discussed the use of the Full Faith & Credit clause to bar subsequent 28 U.S.C. 1983 litigation. McDonald is a labor arbitration case, and the arbitrator had ruled against the union employee. McDonald precluded evidence of the award in the litigaation because it was not appealed and no judgment entered confirming the award. CBA arbitrations are not "judicial proceedings" as required under the Act.

The court in McDonald also denied collateral estoppel and res judicata preclusion of the award in subsequent litigation. The Court did permit evidence of the award under certain conditions: the arbitrator conformed to court guidelines of procedural fairness: an adequate record was prepared; competence of the arbitrators was not questioned.

5. Rooker Feldman Doctrine [TOC]

Federal courts, except the United States Supreme Court pursuant to 28 U.S.C. 1257, lack subject matter jurisdiction to review state court decisions-except for habeas corpus in criminal cases; Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923); D.C. Court of Appeals v. Feldman, 460 U.S. 462 (1983). "United States District Courts . . . do not have jurisdiction . . .over challenges to state court decisions in particular cases arising out of judicial proceedings even if those challenges allege that the state court's action was unconstitutional"; D.C. Court of Appeals.

In Bianchi v. Rylaarsdam, 334 F.3d 895 (9th Cir. 2003) the Ninth Circuit held that Rooker-Feldman prevents federal courts from second guessing state court decisions and barred federal District Courts from hearing de facto appeals from state court judgments; Noël v. Hall, 341 F.3d 1148 (9th Cir. 2003). Accordingly, federal courts-except the Supreme Court-also lack appellate jurisdiction over state civil court judgments; Gilbert v. Ferry, 401 F.3d 411 (6th Cir. 2005). In California, an award confirmed by a judgment is entitled to the same authority as a civil judgment in litigation; CCP 1287.

The doctrine is jurisdictional (Zurich American Ins. Co. v. Sup.Ct. of State of Cal., 326 F.3d 816 [7th Cir. 2003]), rooted in the separation of powers, and predicated on two grounds: Congress vested authority to review state court judgments only in the Supreme Court; 28 U.S.C. 1257(a). District Courts can only exercise original jurisdiction. A disappointed party who does not prevail on a petition to compel arbitration in state court cannot file substantially the same motion in federal court; American Reliable Ins. Co. v. Stillwell, 336 F.3d 311 (4th Cir. 2003); G.C. and K.B. Investments, Inc. v. Wilson; 326 F.3d 1096 (9th Cir. 2003); Doctor's Assocs. v. Distajo, 107 F.3d 126 (2d Cir. 1997).

Rooker Feldman doctrine applies not only to a state's highest court decisions, but to interlocutory state court orders; Pieper v. AAA, Inc., 336 F.3d 458 (2003); Brown & Root, Inc. v. Breckenridge, 211 F.3d 194 (4th Cir. 2000).

Rooker Feldman prohibits federal courts from reviewing state court decisions only if the issue has been litigated or "intertwined"; Weis Bldrs., Inc. v. Kay S. Brown Living Trust, 94 Fed. Appx. 687 (2004) [Non. Cite.].

Note: For an extensive discussion of Rooker-Feldman and the Full Faith & Credit Clause, see Noel v. Hall, 341 F.3d 1148. The Supreme Court has reviewed this doctrine in Lance v. Dennis, 546 U.S. 459 (2006) and held that privities of parties and consequently preclusion under state law is not synonymous with Rooker-Feldman. Although these cases are in litigation, the principles would be applicable to arbitration

The Supreme Court has reviewed various applications of this doctrine in the course of litigation (Exxon Mobil Corp. v. Saudi Basic Inds. Corp., 544 U.S.280 [2005]) and has expanded federal jurisdiction. The Court in Exxon Mobil held that a federal action filed prior to the state action remains viable despite a state court judgment, and the Justices analyzed doctrines of preclusion and the Full Faith & Credit Act; 28 U.S.C. 1738.

Comment: Although Rooker-Feldman and its progeny have been invoked almost exclusively to litigation applicable to state court judgments, an arbitration award confirmed by a state court judgment is susceptible to the doctrine. But arbitration awards are frequently written without pleadings, an evidentiary record or a written decision. Yet the award, confirmed by a state court into a judgment, has the same force and effect as a civil judgment in litigation. Pursuant to the Full Faith & Credit Act, the federal court must defer to a state court judgment. Determining whether the Full Faith and Credit Act applies without a record is a challenging task.

When concurrent jurisdiction between state and federal courts occurs, i.e., one party is removed on grounds of diversity and the other remains in state court, or files a separate lawsuit in federal court, an award in state court confirmed into a judgment is not necessarily barred in federal court under Exxon on Rooker-Feldman grounds. Issues of preclusion on grounds of collateral estoppel and res judicata, a species of substantive state law, should be decided based on local state law.

"Because the doctrine comes into play when there is a prior state court judgment [and not confused with res judicata] the two are not coextensive: the question is whether the plaintiff's federal claim is independent of the state court's action; if so, the relevant doctrine is res judicata, not Rooker-Feldman." Zurich American Ins. Co v. Sup.Ct. for State of Cal., 326 F.3d 816, 822 (7th Cir. 2003). Not all Circuit Courts agree, as Zurich notes.

Practice: The problem of two sovereign jurisdictions clashing with each other constitutes an unnecessary expense and delay for the parties. Because Circuit courts disagree, research in the relevant Circuit is essential.

6. Jurisdiction & Manifest Disregard of Law [TOC]

The Supreme Court has held that an award in "manifest disregard" of the law is a non statutory ground for appeal in federal court and constitutes a basis for subject matter jurisdiction under the FAA; First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). This category of jurisdiction is "facial" rather than "factual" and the court resolves the issue from the language of the record, if any, and the award; Biscanin v. Merrill Lynch & Co., Inc., 407 F.3d 905 (8th Cir. 2005).

Despite a confirmed award in a state court judgment, two federal courts have held that a losing party can file a petition to vacate the award in federal court for "manifest disregard" of the law; Greenberg v. Bear Sterns & Co., 220 F.3d 22 (2d Cir. 2000) and Luong v. Circuit City Stores, Inc., 368 F.3d 1109 (9th Cir. 2004) [withdrawn; 368 F.3d 1113 (2004)]. The Second Circuit has revisited this rule in Bear, Stearns & Co. v. 1109580 Ontario, 409 F.3d 87 (2005).

Note: The United States Supreme Court has held that 9 U.S.C. 10 permitting an appeal from an order confirming a judgment is an action separate from a petition to compel arbitration under 9 U.S.C. 3/4; Cortez Byrd Chips, Inc. v. Bill Harbert Const. Co., 529 U.S. 193 (2000).

See, Appeal, Ch. VI; Award,  Ch. V, infra.

G. Exclusive Federal Jurisdiction [TOC]

A party who seeks removal from state to federal court and files a petition to compel arbitration can assert that a federal statute specifically preempts state litigation and transfers jurisdiction to federal court thereby providing federal jurisdiction absent diversity; Wayne v. DHL Worldwide Express, 294 F.3d 1179 (9th Cir. 2002); Lyons v. Alaska Teamsters Employer Service Corp., 188 F. 3d 1170 (9th Cir. 1999). This preemption doctrine ("conflict preemption") is distinguished from federal preemption of state anti- arbitration statutes as outlined in Southland Corp. v. Keating, 465 U.S.1 (1984); Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985); Kergosian v. Ocean Energy, Inc., 390 F.3d 346 (5th Cir. 2004).

Cross Reference: Jevne v. Sup.Ct., 35 Cal.4th 935 (2005) discusses conflict preemption and concludes that California ethical standards applicable to arbitrators are preempted by NASD and federal law.

1. ERISA [TOC]

In Carter v. Health Net of Cal., Inc., 374 F.3d 830 (9th Cir. 2004) the party challenging a state arbitration award moved the District Court to vacate the award on grounds ERISA (29 U.S.C. 1001 et seq.) preempted all state law and qualified as a federal statute warranting jurisdiction. In an extensive discussion of subject matter jurisdiction over state courts and whether federal law applies, the Ninth Circuit held that in the absence of a "federal question" the District Court lacks jurisdiction under all the relevant sections of the FAA: 9 U.S.C. 4; order to arbitrate; 9 U.S.C. 3; stay of litigation; or 9 U.S.C. 10; confirming and vacating award.

In ERISA non-fiduciary claims, the accrual of claims is determined under federal common law, although the court may "borrow" the state statute; Paine Webber, Inc. v. Faragalli, 61 F.3d 1063 (3d Cir. (1995).

Although the FAA may not confer original jurisdiction, the Supreme Court in Aetna Health, Inc. v. Davila, 542 U.S. 200 (2004) held that ERISA preempts all inconsistent state law retirement plans and invokes federal jurisdiction; Beneficial Nat'l Bk. v. Anderson, 539 U.S. 1 (2003). Accordingly, a party apparently can file litigation under ERISA in federal court. Because statutory claims are subject to arbitration, if the parties have signed an arbitration clause the court will enforce the terms; Bird v. Shearson Lehman/American Express, 926 F.2d 116 (2d Cir. 1991). Arbitration will proceed under FAA rules.

ERISA may also preempt state statutes regulating the "business of insurance" under the McCarran Ferguson Act. See, this Section, infra.

2. Carmack Amendment  (Household Goods) [TOC]

The Carmack Amendment, 49 U.S.C. 14706(a)(1);14708 mandates arbitration of disputes between shippers and carriers of household goods in interstate commerce if the value of the dispute in controversy exceeds $10,000.00; Campbell v. Allied Van Lines, Inc., 410 F.3d 618 (9th Cir. 2005). The statute preempts state laws claiming delay, loss, failure to deliver and damage to property.  The statute includes all common law claims for negligence, fraud, conversion, and intentional infliction of emotional distress; White v. Mayflower Transit, L.L.C., 543 F.3d 581 (9th Cir. 2008).

3. Copyright [TOC]           

Federal jurisdiction over any civil action relating to copyrights is exclusive unless the dispute involves state contract law; Scholastic Entertainment, Inc. v. Fox Entertainment Group, Inc.,336 F.3d 982 (2003). As noted in Chapter I, the initial question for the court is jurisdiction pursuant to U.S.C. 1338 (a); Image Software, Inc. v. Reynolds & Reynolds Co., 459 F.3d. 1944 (10th Cir. 2006).

See, Chapter I-L

4. Patents [TOC]

See, Chapter I-K

H. Jurisdiction in Arbitration by Consent [TOC]

An arbitration clause in a contract between parties agreeing to arbitrate imposes personal jurisdiction on a party seeking removal, i.e., jurisdiction by constructive consent; Vulcan Chemical Technologies, Inc. v. Barker, 297 F.3d 332 (4th Cir. 2002). In Fireman's Fund Ins. Co. v. National Bank of Cooperatives, 103 F.3d 888 (9th Cir. 1996) the court applied state law, i.e., the state "long arm" statute, to determine jurisdiction. A party may also consent to jurisdiction pursuant to arbitration rules incorporated into the contract; Doctor's Assocs., Inc. v. Distajo, 107 F.3d 126 (2d Cir. 1997). Despite consent to arbitrate, the parties may disagree on application of a choice of law issue, infra.

Cross Reference: Jurisdiction in State Court, Part II, Ch. XII.

I. Jurisdiction after Order to Arbitrate [TOC]

When a court orders arbitration it retains jurisdiction to determine any subsequent application or petitions involving the same agreement to arbitrate, i.e., 9 U.S.C. 7 authorizing an arbitrator to issue subpoenas or to confirm, correct or vacate an award. The court may enforce compliance; Stolt-Nielsen v. Celanese AG, 430 F.3d 567 (2d Cir. 2005); contra, Dynegy Midstream Services v. Trammochem, 451 F.3d 89 (2d Cir. 2006).

See, Conduct of Arbitration, Ch. III-B-12.

Note: See, Jurisdiction After Order Denying Arbitration, Ch. II-I.

J. "Administrative" Jurisdiction [TOC]

Strictly speaking, a statutory or contractual requirement that a party exhaust an administrative remedy or comply with conditions precedent in a contract is not a "traditional" jurisdictional question. Although the United States Supreme Court addressed this issue in Zipes v. TWA, Inc., 455 U.S. 385 (1982), characterizing an administrative remedy as a condition precedent to filing litigation, subsequent federal decisions are in conflict; Woodman v. Runyon, 132 F.3d 1330 (10th Cir. 1997); Jones v. Runyon, 91 F.3d 1398 (10th Cir.1996). Compare; Belgrave v. Pena, 254 F.3d 384 (2d Cir. 2001) and Francis v. N.Y., 235 F.3d 763 (2d Cir. 2000).

Examples: Woodman v. Runyon, supra [Title VII];

Johnson v. U.S. Postal Service, 861 F.2d 1475 (10th Cir.1989) [Rehabilitation Act], 29 U.S.C. 79;

Jones v. Runyon, [EEOC] supra;

Chappel v. Laboratory Corp. of America, 232 F.3d 719 (9th Cir. 2000) [ERISA];

Belhomme v. Widnall, 127 F.3d 1214 (10th Cir. 1997) [Title VII].

Resolution is determined, in part, on whether Congress has conferred independent authority on an administrative agency; E.E.O.C. v. Waffle House, Inc., 534 U.S. 755 (2002). In Waffle House, Inc., the Supreme Court held that the administrative agency is not bound by the arbitration clause applicable to the employee. Strictly speaking, this is neither a jurisdiction issue nor a preemption issue, i.e., exclusion of FAA application, but a question of who is a party to the arbitration agreement.

K. Insurance Exception: McCarran Ferguson Act [TOC]

The McCarran-Ferguson Act, 15 U.S.C. 1012(b), provides: "No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the 'business of insurance.'" The Act applies to the "business of insurance" conducted within a state and excludes federal law from application in state litigation. If a state law qualifies within the category of "insurance", the FAA is inapplicable; Munich American Reinsurance Co. v. Crawford, 141 F.3d 585 (5th Cir. Cir.1998). Federal courts characterize this interpretation as "reverse preemption"; American Bankers Ins. Co. of Florida v. Inman, 436 F.3d 490 (5th Cir. 2006).

See, also, Ky. Assn. of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003) [(ERISA].

Barring the FAA from applying to state law affecting the "business of insurance" depends upon whether the federal statute would impair, invalidate or supersede state law. A claimant must identify the relevant state statute invalidated or impaired by application of federal law; American Heritage Life Ins. Co., v. Orr, 294 F.3d 702 (5th Cir. 2002).

A major challenge to application of this legislation in the context of HMOs and ERISA arose in Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355 (2002). Rush is not an arbitration case, per se, but the Supreme Court commented on the scope of the McCarran Act as it applies to the "business of insurance" and also denied enforcement of a conflict resolution clause in the contract as not constituting an "arbitration."

McCarran Ferguson is also not a “jurisdictional” rule but included here because it exempts insurance contract disputes from application of the FAA. In that sense, federal courts lack "jurisdiction" to compel arbitration.

See, this Section, (G)  preempting state retirement plans conflicting with ERISA; Aetna Health, Inc. v. Davila, 542 U.S. 200 (2004).

Cross Reference: See list of California cases, Part II- Ch. XVII, C-5-2 exempting the FAA from the "business of insurance" in HMO contracts; For a general discussion of preemption, see, U.S. v. Locke, 529 U.S. 89 (2000) and English v. General Elec. Co., 496 U.S. 72 (1990).

L. Consumer Warranty: Magnuson Moss Warranty Act [TOC]

The Magnuson-Moss Warranty Act (15 U.S.C. 23 2310) confers jurisdiction on federal courts to resolve disputes involving a warrantor's failure to comply with written obligations in a consumer warranty. Arbitration clauses in written warranties are enforceable; Walton v. Rose Mobile Homes, Inc., 305 F.3d 1268 (11th Cir. 2002).

In Richardson v. Palm Harbor Homes, 254 F.3d 1321 (11th Cir. 2001) the court held this legislation superseded the FAA as to written warranties and foreclosed arbitration on these representations but oral warranties were not covered by the statute.

Summary: All of the doctrines above (except McCarran-Ferguson and Magnuson) are predicated on principles of federalism. The doctrine of abstention is invoked at the pleading stage, and, in effect, expands federal jurisdiction when district courts accept jurisdiction or refuse to remand cases removed from state courts despite the prospect of parallel proceedings. The Anti Injunction Act, the Rooker-Feldman Doctrine, and the Full Faith and Credit Act are intended to restrict federal jurisdiction over state courts and each applies to litigation and arbitration. The aforementioned statutes involve arbitration clauses in contracts and the role of federal courts attempting to enjoin state court actions.

Chapter III. Arbitration: Statutory Authority: Federal Court [TOC]

Introduction

Federal law reflects a strong policy favoring arbitration, and, consequently, federal courts endorse enforcement of arbitration agreements. Arbitration of commercial claims is governed by the Federal Arbitration Act (FAA) as outlined in 9 U.S.C. 1-16:

"A written provision in a . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for revocation of any contract;" 9 U.S.C. 2. The FAA mandates enforcement of written agreements to arbitrate disputes between parties but is remedial without creating new rights; Moses H. Cone Memorial Hosp. v. Mercury Construction Co., 460 U.S. 1 (1953).

Note: This Chapter is a brief overview of topics discussed in more detail in subsequent Sections: Ch. III- B

A. Contractual Arbitration [TOC]

1. Arbitration Defined [TOC]

The Federal Arbitration Act does not define "arbitration." The Supreme Court has noted, however, that arbitration occurs when parties in a dispute choose a third party to render a final and binding decision on the merits of a controversy based on evidence presented by the parties at a hearing presided over by an officer with specific powers. Arbitration, said the Court, includes submission of evidence, examination and cross examination of witnesses;" Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355 (2002).

In Fit Tech, Inc. v. Bally Total Fitness Holding Corp., 379 F.3d 654 (1st Cir. 2004) the court decried the lack of a uniform definition of arbitration. The question is "how closely the specified procedure resembles arbitration and whether treating the procedure as arbitration serves the intended purposes of Congress;" Accord; Genesco v. Kakiuchi & Co., 815 F.2d 840 (2d Cir. 1987). The Ninth Circuit has determined that an appraisal qualified as an arbitration because the California statute specifically so provides; Portland Gen. Elec. Co. v. U.S. Bank Trust Nat'l. Assn., 218 F.3d 1085 (9th Cir. 2000) [CBA].

To constitute an "arbitration," Federal courts have not necessarily insisted that the specific word appear in the language of a clause reciting a method of resolving disputes. The relevant test is the intent of the parties to submit their disputes to a designated process to achieve a definitive settlement; McDonell Douglas Fin. Corp. v. Pa. Power & Light Co., 858 F.2d 825 (2d Cir. 1988) [collecting cases].

Comment: McDonell Douglas should not be followed. Failure to expressly provide for binding and final arbitration before a neutral arbitrator, or one appointed by the court, invites litigation and additional cost.

Whether an agreement qualifies as an "arbitration" is crucial in determining whether to enforce its provisions. The FAA preempts state law prohibiting or inhibiting "arbitration", but if an arbitration clause in a document does not qualify as an agreement to "arbitrate", the federal statute is inapplicable. An arbitration clause which mandates non-binding arbitration is just that-mandatory and non binding. An appellate court may lack jurisdiction to review and enforce this kind of agreement but in Dow Corning v. Safety Nat. Gas Corp., 335 F.3d 742 (8th Cir. 2003) the court concluded the FAA authorized jurisdiction.

2. Components of Arbitration [TOC]

Whether an "agreement" between parties qualifies as subject to arbitration depends upon substantive and procedural considerations:

a. Arbitral Forum [TOC]

In determining whether, in fact, a "true" arbitration had been conducted, the court in Brennan v. King, 139 F.3d 258 (1st Cir. 1998) held that the arbitration clause in an agreement did not provide a . . ."forum for the entire resolution of a [dispute]" @ 266. The Brennan court regarded the absence of finality and a binding agreement dispositive.

See, Arbitrability, Ch. IV-E

In Floss v. Ryan' s Family Steak Houses, Inc., 211 F.3d 306 (6th Cir. 2000) the court concluded that composition of the arbitrators was flawed and did not assure the parties an independent source of dispute resolution; Walker v. Ryan's Family Steak Houses, Inc., 400 F.3d 370 (6th Cir. 2005); accord, Hooters of America, Inc. v. Phillips,173 F.3d 933 (4th Cir. 1999); Murray v. UFCW Int., 289 F.3d 297 (4th Cir. 2002).

b. Procedural Fairness [TOC]

Other Federal courts, although not defining "arbitration," have reviewed the language of arbitration clauses with an eye toward assuring "fundamental fairness" of the process between the parties, perhaps similar to "procedural due process." Through decisional law, these courts are examining the substantive provisions of the arbitration clause and/or the procedural mechanism invoked for resolution of the dispute; Hooters of America, Inc. v. Phillips, 173 F.3d 933 (11th Cir. 1999) [court analogizes arbitration clause to "bad faith"]. In Generica Limited v. Pharmaceutical Basics, Inc., 125 F.3d. 1123 (1997) and Cole v. Burns Intern. Sec. Services, 105 F.3d 1465, 1482 (D.C. Cir.1997) the courts held that the law will not enforce an arbitration agreement indifferent to the rights a party waives or the burdens imposed.

Cross Reference: The California Supreme Court has refused to enforce arbitration agreements in employment agreements unless the employer offers a neutral forum; allows discovery; pays the cost of arbitration; and requires the arbitrator to issue a "reasoned award;" Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 93 (2000). The State Supreme Court invoked the doctrine of "unconscionability" to invalidate unfair arbitration clauses lacking bilateral remedies or mutual obligations on grounds these elements are essentially procedural guidelines to insure fundamental fairness between the parties. Adopting the label "unconscionable" serves as an application of substantive state law.

See, Unconscionable Clauses, Ch. IV-G-2-a.

Cross Reference: Part II; XVII-C-4. Unconscionable Contracts

c. Binding Agreement [TOC]

As noted above, an agreement must be binding on the parties, but the Ninth Circuit has broadened the definition of "arbitration," dispensing with the "binding" requirement by holding the intent of the parties and the presumption of arbitrability should prevail; Wolsey v. Foodmaker, Inc., 144 F.3d 105 (9th Cir. 1997); accord, Harris v. Nissan Motor Co., 111 F.3d 343 (3d Cir. 1997). The conflict is also discussed in Beers Const. Co. v. Pikeview Methodist Hosp. of Ky., 129 Fed.Appx. 226 (6th Cir. 2005) [Non.Cite].

Without discussion, the Eleventh Circuit held that a "binding" arbitration takes effect without confirmation of the arbitration award by the court absent agreement otherwise by the parties; Centurion Air Cargo, Inc., v. UPS Co., 420 F.3d 1146 (11th Cir. 2005).

Practice: Regardless of Wolsey, the parties should specifically refer to a "binding and final" agreement evidenced by an award and confirmed by a judgment.

In Dluhos v. Strasberg, 321 F.3d 365 (2003) the court examined the terms of the agreement for its "commercial" content in light of the language of the FAA. Because interstate "commerce" is essential for federal jurisdiction, the court decision is important for its discussion of the components of a legally enforceable "arbitration"; Harrison v. Nissan Motor Corp. in USA, 111 F.3d 343 (3d Cir. 1997).

See, III-B-4 for discussion of “commerce.’

d. Arbitrator Neutrality [TOC]

The FAA addresses the "neutrality" of an arbitrator (in appealing from a judgment confirming an award) only indirectly, i.e., 9 U.S.C. 16 lists the "evident partiality" of an arbitrator as a ground to vacate the award. Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968). Unlike California law, provisions for challenging the neutrality of an arbitrator prior to an arbitration are absent in federal law.

See, Appeal, Ch. VI; Award, Ch. V, infra.

Cross Reference: Arbitrator Disclosure. California has legislatively required substantial disclosure of a prospective arbitrator's personal and professional relationship with the parties; CCP 1281.9. See, Disclosure and Disqualification of Arbitrators, Part II, Ch. XIX.

B. Federal Arbitration Act (FAA) [TOC]

Any state anti-arbitration statute or judicial decision applicable to a written contract involving a transaction in interstate commerce is unenforceable in federal and state courts, preempted by the FAA based on the Supremacy Clause of the United States Constitution and Congressional authority to regulate commerce pursuant to the Commerce Clause; Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1(1983); Southland Corp. v. Keating, 465 U.S. 1 (1984); Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469 (9th Cir.1991).

1. Scope of Coverage  [TOC]

a. Commercial Claims  [TOC]

The FAA includes contractual arbitration of commercial cases and other categories of contractually based cases, including employment, consumer disputes, and franchise agreements within the scope of its coverage. The statute excludes railroad employees, seamen and transportation workers in interstate commerce; Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001).

The FAA, 9 U.S.C. 2, authorizes two kinds of arbitration clauses: 1) pre-dispute arbitration clauses included in a contract to settle a "controversy thereafter arising"; and, 2) post-dispute agreements to arbitrate alleged breaches in a contract (an "existing controversy"). The statute requires an agreement must be in writing ("a written provision"); involve "commerce," (a transaction involving commerce"); and the controversy must "aris[e] out of such contract, transaction or refusal to perform."

Employment contracts containing an arbitration clause executed between union and management are preempted from state enforcement by the Labor Management Relations Act (LMRA) although federal courts share concurrent jurisdiction in representational disputes; Service Employees Int. Union v. St. Vincent Medical Ctr., 344 F.3d 977 (9th Cir. 2003). State courts retain limited jurisdiction and California authorizes arbitration of labor management disputes although mostly limited to governmental agencies not covered by the LMRA; CCP 1280; American Federation of State, et al., Employees v. MWD, 126 Cal.App.4th 247 (2005).

b. Federal Statutory Rights  [TOC]

Federal statutory rights are subject to arbitration but a contractual arbitration clause and procedural process must enable a claimant to vindicate statutory rights; Gilmer v. Interstate /Johnson Lane Corp., 500 U.S. 20 (1991).

Federal statutory rights subject to arbitration:

Age Discrimination in Employment Act: 29 U.S.C. 621; Gilmer, supra;

Americans with Disabilities Act: 42 U.S.C. 12182; Campbell v. Gen. Dynamics Govt. Systems Corp., 407 F.3d 546 (1st Cir. 2005); Bercovich v. Baldwin School, Inc., 133 F.3d 141 (1st Cir. 1998);

Anti-Trust (Sherman Act): 15 U.S.C. 1-7; Mitsubishi Motors Corp. v. Soler Chrysler Plymouth, Inc., 473 U.S. 614 (1985); JLM Inds., Inc. v. Stolt-Nielsen S.A., 387 F.3d 163 (2d Cir. 2004);

Automobile Dealers Day in Court: 15 U.S.C. 1221 (mutual consent required); Arciniaga v. GMC, 460 F.3d 231 (2d Cir. 2006) [cert. denied]; Volkswagen of America v. Sud’s of Peoria, 474 F.3d 966 (7the Cir. 2007);

Credit Repair Organizations Act: 15 U.S.C. 1679 (CROA); Gay v. CreditInform, 511 F.3d 369 (3d Cir. 2007); accord,  Picard v. Credit Solutions, Inc., 564 F.3d 1249  (11th Cir. 2009);

 ERISA: 29 U.S. C. 1001; Rush v. Prudential HMO, Inc. v. Moran, 538 U.S. 966 (2002);

Fair Debt Collection Practices Act: 15 U.S.C. 1692; Stark v. Sandberg, Phoenix, & von Gontard, P.C, 381 F.3d 793 (8th Cir. 2005);

Fair Employment Housing Act (Cal.): Circuit City Stores v. Najd, 294 F.3d 1104 (9th Cir. (2002);

Fair Labor Standards Act: 29 U.S.C. 201-219; Bailey v. Ameriquest Mortg. Co., 346 F.3d 821 (8th Cir. 2003); Adkins v. Labor Ready, Inc., 303 F.3d 490 (4th Cir. 2002);

Family & Medical Leave Act: 29 U.S.C. 2601: O'Neil v. Hilton Head Hosp., 115 F.3d

272 (4th Cir. 1997);

Federal Communications Act: 47 U.S.C. 207; Lozano v. AT & T Wireless Services, Inc. 504 F.3d 718 (9th Cir. 2007);

Lanham Act: 15 U.S.C. 1125; Simula, Inc. v. Autoliv, Inc.,175 F.3d 716 (9th Cir. (1999);

Magnuson-Moss Warranty Trade Commission Act: 15 U.S.C. 2301; Davis v. Southern Energy Homes, Inc., 305 F.3d 1268 (11th Cir. 2002); Walton v. Rose Mobile Homes LLC, 298 F.3d 470 (5th Cir. 2002);

Motor Vehicle Franchise Contract Arbitration Fairness Act; 15 U.S.C. 1226; Volkswagen of America, Inc. v. Sud’s of Peoria, 474 F.3d 966 (7th Cir. 2007);

Petroleum Marketing Practices Act: 15 U.S.C. 2801; Graham Oil Co. v. ARCO Products Co., 43 F.3d 1244 (9th Cir. 1995);

Real Estate Settlement Procedures Act: Anders v. Hometown Mortgage Services, Inc., 346 F.3d 1024 (11th Cir. 2003);

RICO: Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987); PacifiCare Health Systems, Inc. v. Book, 538 U.S. 401 (2003);

Securities & Exchange Act: 15 U.S.C. 78(b): Three Valleys Municipal Water District v. E.F. Hutton & Co., 925 F.2d 1136 (9th Cir.1991);

Title VII (42 U.S.C. 2000): Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001); E.E.O.C. v. Luce, Forward, Hamilton & Scripps; 345 F.3d 742 (9th Cir. 2003); Hooters of America, Inc. v. Phillips, 173 F.3d 933 (4th Cir.1999); Paladino v. Avnet Computer Techs., Inc., 134 F.3d 1054 (11th Cir. 1998);

Truth in Lending Act: Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000).

Practice: The history of Arbitration is reviewed in Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978 (2d Cir. 1942).

Note: To validate federal rights in arbitration, the arbitrator must adhere to the language of the individual statute, including remedies, costs, interest and fees. In enforcing an arbitration clause, the costs imposed on a party is relevant in determining whether statutory rights can be vindicated.

c. Labor Arbitration & Statutory Rights  [TOC]

Wright v. Universal Maritime Service Corp., 525 U.S. 70 (1998) confirmed the right of an employee working under a CBA to file litigation for alleged civil rights violations (Title VII), despite a prior adverse labor arbitration ruling, unless the CBA clearly and unmistakably waives this right; Eastern Assoc. Coal Corp. v. Massey, 373 F.3d 530 (4th Cir. 2004). The CBA does not require employees to exhaust their remedies in arbitration before pursuing their claims in court; Collins v. Lobdell, 188 F.3d 1124 (9th Cir. 1999).

In an earlier decision, McDonald v. West Branch, Mich., 466 U.S. 284 (1984), the court adopted the reasoning of Alexander v. Gardner-Denver, 415 U.S. 36 (1974), a decision permitting an employee to pursue federal statutory remedies despite an adverse decision by an arbitrator in a CBA hearing. But the court also held that the evidence and ruling of an arbitrator was admissible in a litigated Title VII case contingent upon "the adequacy of the record"…and the arbitral determination gives full consideration to the emloyee’s [statutory rights];” Alexander; Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 35 (1991); Costa v. Desert Palace, Inc., 299 F.3d. 838 (9th Cir. 2002); Collins v. N.Y.C.T.A, 305 F.3d 113 (2d Cir. 2002) [affirmed on other grounds]. In Serling v. American Airlines, Inc., 237 Fed.Appx. 972 (5th Cir. 2007) the court said the admission of evidence introduced at an arbitration hearing is discretionary with the trial judge.

Objection to prior arbitration awards are nevertheless subject to inadmissibility when offered in litigation ensuing after the arbitrator issued an award.  The award must be relevant to the issues in litigation.  In Arlio v. Lively, 474 F.3d 46 (2d Cir. 2007 the court reversed a judgment in litigation on grounds the trial court permitted the plaintiff to testify to evidence on an unrelated claim brought in a CBA.

In Granite Rock Co.v. International Brotherhood of Teamsters, 130 S.Ct. 2847 (2010) the Supreme Court held that contractual interpretation of an arbitration clause under a labor dispute and a commercial dispute under the FAA were treated the same. 

2. Coverage of Claims "Thereafter Arising;"  [TOC]

To invoke the statutory term of claims "thereafter arising" (from the dispute), arbitration agreements incorporate various phrases in an attempt to describe the scope of coverage, i.e., "arising in connection with"; "any and all disputes;" any disputes "related to." An arbitration clause can include torts “arising out of” a contract , e.g., breach of fiduciary duty, defamation. See, Arbitration Clauses, Ch. IV-E, infra.

Cross Reference

3. "Writing" Required  [TOC]

Title 9 U.S.C. 2 requires a written agreement in order to enforce arbitration but in Tinder v. Pinkerton Security, 305 F.3d 728 (7th Cir. 2002) the court held that an employee need not necessarily sign a document; accord, Caley v. Gulfstream Aerospace Corp., 428 F.3d 1359 (11th Cir. 2005) The employee, having worked for the employer subsequent to hiring, is adequate consideration to enforce the agreement [implied by conduct]. Accord,  Seawright v. American General Financial Services, Inc., 507 F.3d 967 (6th Cir. 2007).

The court may also consider documents or the Rules of an arbitration service provider ncorporated by reference in determining whether to enforce the employment agreement; Lifescan, Inc. v. Premier Diabetic Services, Inc., 363 F.3d 1010 (9th Cir. 2004). The FAA does not expressly require a party to sign the agreement to arbitrate but obviously a signature is better practice.

Comment: Modern technology has a parallel to a "writing" in the form of e mail. In Campbell v. Gen. Dynamics Govt. System, 407 F.3d 546 (1st Cir. 2005) the court approved e mail as equivalent to a "writing", citing the Electronic Signature in Global and National Commerce Act, 15 U.S.C. 7001-7031. The court also noted that a properly formed e-mail notifying employees of policy changes is sufficient to satisfy the requirements of a “writing” required by the FAA; Specht v. Netscape Comm. Corp., 306 F.3d 17 (2d Cir. 2002).

4. "Commerce" Required   [TOC]

a. "Commerce" Defined   [TOC]

The United States Supreme Court has defined "commerce", as used in the FAA, in extremely broad terms; Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995). The Court said: "Congress' Commerce Clause power may be exercised in individual cases without showing any specific effect upon interstate commerce in the aggregate if the economic activity in question would represent a general practice subject to federal control"; Citizens Bank v. Alafabco, Inc., 539 U.S. 52 (2003) [citing cases].

The phrase "evidencing a transaction" in the FAA means that only the transaction turns out, in fact, to have "involved" commerce, a word functionally equivalent to "affecting" commerce as recited in the Commerce Clause despite absence of evidence the parties contemplated an interstate commerce connection; Allied-Bruce Terminex Co., Inc. The term invokes the broadest permissible exercise of Congressional power under the Commerce Clause; Alafabco; Jenkins v. First American Cash Advance of Ga., LLC, 100 F.3d 868 (4th Cir. 2005).

Cross Reference: California law is comparable in defining “commerce;” Basura v. U.S. Home Corp., 98 Cal. App.4th 1205 (2002).

b. Interstate Commerce   [TOC]

Written agreements involving employment of workers in "interstate commerce" exclude railroad employees or seamen from arbitration under the FAA; 9 U.S.C.1; Circuit City Stores, Inc. v. Adams, 535 U.S. 1112 (2002). Thus, at least two preliminary issues arise: the transaction must be in interstate "commerce," and involve "workers".

c. "Workers" in Interstate Commerce  [TOC]

The FAA exempts employment contracts of workers “engaged” in foreign or interstate commerce; 9 U.S.C.1. A "worker" must be actually involved in the interstate transportation of goods; Hill v. Rent-A-Center, Inc., 398 F.3d, 1286 (11th Cir. 2005); McWilliams v. Logicon, Inc., 143 F.3d 573 (10th Cir. 1998); Rojas v. JT Communications, Inc., 87 F.3d 745 (5th Cir. 1996); O'Neil v. Hilton Head Hospital, 115 F.3d 272 (4th Cir. 1997).

5. Exclusion from Coverage  [TOC]

The threshold issue in every arbitration clause litigated in state or federal court is jurisdiction. In federal court, 9 U.S.C. 1 & 2 require compliance with: the definition of an "arbitration"; the judicial definition of "commerce"; the class of "workers" included in coverage or exemption; a "claim arising out of the contract;” and, if litigation is removed from state court (28 U.S.C. 1332[b]) on grounds of diversity, a claim within the minimum dollar amount of $75,000.00. In some cases, Congress has explicitly occupied the field and preempted the FAA. Labor arbitration and ERISA are examples.

Congress has also excluded automobile dealers from mandatory pre- dispute arbitration initiated by franchisors; Motor Vehicle Franchise Act; 15 U.S.C 1221 (amended).

6. Order to Arbitrate   [TOC]

Introduction:

If one party has filed litigation, the other party files a petition seeking an order compelling the parties to arbitrate and a stay of the civil action or proceedings. These are separate orders. This Chapter, and the following, should be read together.

If one party fails, refuses or neglects to arbitrate, 9 U.S.C. 4 authorizes the other party to petition the court . . ."for an order directing that such arbitration proceed in the manner provided for in [the] agreement . . ." After a hearing (with provisions for notice and service), if the court is satisfied that... "the making of the agreement for arbitration or the failure to comply therewith is not in issue..., [it] can order the arbitration to proceed according to the terms of the agreement."

If for any reason the parties cannot select an arbitrator, or refuse to do so, or the arbitrator is unable to act, the court may appoint; 9 U.S.C. 6.

An "order" to arbitrate is the usual method of compelling arbitration, but denial of an injunction to prevent arbitration is the equivalent of an order to arbitrate; 9 U.S.C. 16 (a)  (2); ConArt, Inc.v. Hellmuth, 504 F.3d 1208  (11th Cir. 2007) . In order to obtain a judicial determination in District Court of the validity and enforcement of an arbitration clause, the moving party may elect declaratory relief or summary judgment if litigation is on file.

In the absence of litigation on file, a party alleging breach of a contract containing a pre-dispute arbitration clause will give "notice" to the other party and demand arbitration. If the opposition responds to the notice and agrees to arbitration, no judicial intervention is needed except to review the ultimate award or appoint an arbitrator in the event the parties cannot agree; 9 U.S.C. 5; 9 U.S.C. 10. Only if a party "refuses, neglects or fails to arbitrate” does the moving party seek a court order. Formal pleading is not required but the moving party ordinarily provides a submission agreement, unilaterally or by stipulation, setting forth the claims and the nature of relief demanded; Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991); Schoenduve v. Lucent Technologies, 442 F.3d 727 (9th Cir. 2006).

A party must "refuse" (or fail/neglect) to arbitrate. In Jacobs v. USA Track & Field, 374 F.3d 85 (2d Cir. 2004) the parties disagreed on the applicable set of arbitration rules governing the arbitration. The court held that the Respondent (in District Court) had not "refused" to arbitrate, only disagreed as to the appropriate arbitration rules, and the party seeking arbitration should have filed a motion for declaratory relief; Accord, LAIF X SPRL v. Axtel, S.A.de C.V., 390 F.3d 194 (2d Cir. 2004).

Practice: 9 U.S.C. 4 also provides for a jury in the event of a dispute whether to enforce the "making of the agreement." As a practical matter, the issue is one of law, i.e. whether the arbitration clause is revocable on grounds of "law or equity" (9 U.S.C. 2), and resolved by summary judgment. "Revocation" (rescission) of the agreement is determined by substantive state law, i.e., waiver, fraud, duress, unconscionability or public policy.

See, Chapter IV: Enforcing or Revoking Arbitration Clauses

a. Appeal from Order to Arbitrate   [TOC]

An order granting a petition to compel arbitration is not subject to appeal and reviewable only on an appeal from the judgment; 9 U.S.C. 16 (a)(3). But if the moving party elects to file summary judgment or declaratory relief, a party can appeal an adverse ruling.

b. Appeal from Order Denying Arbitration   [TOC]

An order denying a petition to compel arbitration is interlocutory but appealable pursuant to 9 U.S.C. 16 (a)(1)(B). A party cannot appeal from an order granting a motion to compel arbitration; only from an order denying the motion; 9 U.S.C. 16 (b)(2);

Interlocutory appeals (like an order denying a motion to compel arbitration) are governed by time limitations in Fed.R.App. 4(a)(A). This rule provides that a party must file a notice of appeal within 30 days after the "judgment or order appealed from is entered." Timely notice is jurisdictional; Marie v. Allied Mortgage Corp., 402 F.3d 1 (1st Cir. 2005).

Practice: In some cases a party appealing form an order denying arbitration entitles the motion to  compel arbitration a motion to dismiss. The court in  Conrad v. Phone Directories, Co., Inc. 585 F.3d 1376 (10th Cir. 2009) will not treat this misidentified title as a petiton to compel arbitration and prefers the “bright line” rule requiring a correct title or “petition to compel arbitration.” 

A motion to reconsider a previously denied motion to compel arbitration is not independently subject to interlocutory appeal; Cozza v. Network Assocs., Inc., 362 F.3d 12 (1st Cir. 2004). The "immediacy" of appeal from an order denying arbitration is not discussed in the FAA.

A decision by the court to delay a ruling on "arbitrability" to allow discovery on that issue, and simultaneously continue the litigation, qualifies as a denial of a petition to compel arbitration and subject to an interlocutory appeal; Oblix, Inc. v. Winiecki, 374 F.3d 488 (7th Cir. 2004); Boomer v. AT & T Corp., 309 F.3d 404 (7th Cir. 2002); Sandvik AB v. Advent Corp., 220 F.3d 99 (3d Cir. 2000). Similarly, a motion to dismiss is ordinarily a final order and probably the equivalent of an order denying arbitration; Fit Tech, Inc. v. Bally Total Fitness Holding Corp., 374 F.3d 1 (1st Cir. (2004).

The Ninth Circuit refused to stay discovery after the District Court signed an order denying a petition to compel arbitration on the ground a frivolous appeal would frustrate litigation; Britton v. Co-op Banking Grp., 916 F.2d 1405 (9th Cir.1990); Motorola Credit Corp. v. Uzan, 388 F.3d 39 (2d Cir. 2004). Other Circuit Courts have rejected this opinion; McCauley v. Halliburton Energy Services, Inc., 413 F.3d 1158 (10th Cir. 2005); Blinko v. GreeTree Servicing, LLC, 366 F.3d 1249 (11th Cir. 2004); Bradford-Scott Data Corp., Inc. v. Physician Computer Network, Inc., 128 F.3d 504 (7th Cir. 1997).

McCauley notes that 9 U.S. C. 16 permits an appeal from a denial of an order to arbitrate but questions whether this order divests the trial court from jurisdiction pending an appeal. A non-frivolous appeal divests the court of jurisdiction. In Hardin v. First Cash Financial Services, 465 F.3d 470 (10th Cir. 2006) the Tenth Circuit reaffirmed McCauley and suggested the moving party seek a hearing in the District Court confirming the appeal is non-frivolous.

The Ninth Circuit disagrees; Britton v. Co-Op Banking Group, 916 F.3d 1405 (9th Cir. 1990).  That opinion was rejected in Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207 (3d Cir. 2007) and cites additional case law on this topic.

See, Appeal From Orders, this Chapter,  B-6-a.

If a court orders the civil action to arbitration, other sections of the FAA include appointment of an arbitrator; issuance of subpoenas and attendance of witnesses; confirmation, correction and vacation of the arbitration award; infra. These topics are treated separately (9 U.S.C. 5-16, infra).

Note: A related question is whether a federal court can stay "collateral proceedings" in a state court pursuant to the Anti-Injunction Act, the All Writs Act or the Rooker-Feldman doctrine; Great Earth Cos. v. Simons, 288 F.3d 878 (6th Cir. 2002); Ch. II-F-3, 5.

7. Order Staying Litigation  [TOC]

Title 9 U.S.C. 3, in conjunction with 9 U.S.C. 4, authorizes the court to stay litigation of  . ."any issue referable to arbitration under an agreement in writing . . . upon being satisfied that the issue involved in such suit...is referable to arbitration under such an agreement [and], shall on application of one of the parties . . . stay the trial until such arbitration has been had in accordance with the terms of the agreement" (absent default, i.e., "waiver" by the applicant in proceeding with the arbitration).

The Ninth Circuit has held that the District Court may "administratively close" the case thereby eliminating an order of dismissal and subsequent appeal; Dees v. Billy, M.D., 394 F.3d 1290 (9th Cir. 2005); CitiFinancial Corp. v. Harrison, 453 F.3d 245 (5th Cir. 2006) [administrative dismissal"].

Despite dismissal of an action, and simultaneously compelling arbitration, the court retains jurisdiction to rule on a motion for sanctions; Jackson v. Cintas Corp., 425 F.3d 1313 (11th Cir.) 2005 [collateral issue].

Section 3 does not specifically address whether the court can stay litigation of third parties but Puerto Rico Tel. Co. Inc. v. U.S. Phone Mfg. Corp., 424 F.3d 97 (1st Cir. 2005) suggests federal courts retain that power; City of Bismark v. Toltz, King, Duval, Anderson & Assocs., 767 F.2d 429 (8th Cir. 1985).

Cross Reference:Unlike California law, the  FAA does not give a court authority to issue equitable remedies, such as a temporary injunction, to maintain the status quo between the parties. Comedy Club, Inc. v. Improv West Associates, 502 F.3d 1100 (9th Cir. 2007). Cert granted and reversed based on Hall Street Assocs. L.L.C. v. Mattel, Inc., 128 S.Ct.1286( 2008). On remand, decision amended January 23, 2009 without change in judgment; 553 F.3d 1277 (9th Cir. 2009).

See, CCP 1281.8 & Ch. XVII-E-3-c: Provisional Remdies; Injunctions

Practice: In Dean Witter Reynolds v. Byrd, 470 U.S. 413 (1985), a two party case, the contract contained arbitrable and non arbitrable claims. The court ordered arbitrable claims to arbitration but refused to stay non arbitrable claims. The potential for inconsistent results is obvious but the court said the parties' agreement must be respected. Puerto Rico Telephone Co., Inc. involved multiple parties with arbitrable and non arbitrable claims. The court ordered arbitration and stayed litigation.
See, Ch. II-E-1.

Note: This subject (order staying litigation) includes appellate rights discussed infra, Appeal , Ch. VI.

Comment: To sum up: 9 U.S.C. 3 and 4: Section 3 applies when the party files an action despite an arbitration clause; Section 4 applies to actions initiated by a party seeking to enforce an arbitration provision and stay an action.

In Fidelity Fed. Bank v. Durga Ma Corp., 386 F.3d 1086 (9th Cir. 2004) the court held the FAA procedural rules apply in federal court despite a California choice of law clause.

Cross Reference: According to the California Supreme Court, 9 U.S.C. 3 and 4 do not apply in state court even if the parties have agreed to FAA rules governing the arbitration; Cronus Investment, Inc. v. Concierge Services, 35 Cal.4th 376 (2005), citing Volt Information Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. University, 489 U.S. 468 (1989).

8. Jury Waiver   [TOC]

Federal courts authorize trial by jury in civil actions (U.S. Const., Art. VII), and parties who agree to arbitration in lieu of litigation must surrender that right in order to arbitrate. Given the importance of juries in American jurisprudence, courts scrutinize jury waivers in arbitration clauses closely. Ninth Circuit decisional law construes jury waivers strictly; Renteria v. Prudential Ins. Co. of America, 113 F.3d 1104 (9th Cir. 1997). Other Circuits disagree, holding a jury waiver is implied by an agreement to arbitrate; Cooper v. MRM Inv. Co., 367 F.3d 493 (6th Cir. 2004). Nor does the standard for waiver require a more demanding scrutiny under a "knowing and voluntary standard;" Caley v. Gulfstream AeroSpace Corp., 428 F.3d 1359 (11th Cir. 2005).

Compare: Snowden v. Checkpoint Cashing, 290 F.3d 631(4th Cir. 2002) with Renteria v. Prudential. Depending on the Circuit, the waiver must be: explicit, knowing and voluntary; Kummetz v. Tech Mold, Inc., 152 F.3d 1153 (9th Cir. 1998); Prudential Ins. Co. of America v. Lai, 42 F.3d 1299 (9th Cir.1994) or waiver is implied; Snowden; Walker v. Ryan's Family Steak Houses, Inc., 400 F.3d 370 (6th Cir.2005); Burden v. Check into Cash of Ky., 267 F.3d 483 (6th Cir. 2001).

An express jury waiver does not implicate the Seventh Amendment; American Heritage Life Ins. Co. v. Orr, 294 F.3d 702 (5th Cir. 2002)

Cross Reference: The California rule on inapplicability of the Seventh Amendment in state court is the same; Viola v. Dept. of Managed Health Care, 133 Cal.App.4th 299 (2005).

9. Venue  [TOC]

a. Petition to Compel Arbitration  [TOC]

Venue is often confused with jurisdiction. Jurisdiction is the power to adjudicate, a Congressional grant of authority beyond the scope of litigants to confer. Venue is the locality of the lawsuit where judicial authority is exercised and relates to the convenience of the litigants, although also Congressionally authorized, and may be waived; Neirbo Co. v. Bethlehem Shipbuilding Co., 308 U.S. 165 (1939).

Title 9 U.S.C. 4. authorizing the court to order arbitration provides. ". . the hearing and proceedings under such agreement [to arbitrate] shall be within the district in which the petition for an order directing such arbitration is filed." The Circuits are not in accord whether the petitioner must file the petition to compel arbitration in the district named in the arbitration agreement. "The FAA does not require venue in the contractually designated locale;" Textile Unlimited, Inc. v. BMH & Co., 240 F.3d 781(9th Cir. 2001). Ansari v. Qwest Communications Corp. held this statute jurisdictional and enforced its provisions; 414 F.3d 1214 (10th Cir. 2005). In Image Software, Inc. v. Reynolds & Reynolds Co., 459 F.3d 1044 (10th Cir. 2006) the court reversed its Ansari opinion and held the 9 U.S.C. 4 is a venue provision, not jurisdictional and the parties can waive enforcement. Ansari cites several other Circuit opinions on this subject.

An action to enjoin an arbitration is arguably reviewable under the general venue section for injunctions under 28 U.S.C. 1391. In Textile Limited, Inc. the court held this statute applied to a motion to enjoin arbitration.

Note: Actions to enjoin enforcement of an arbitration clause are usually filed when no litigation is on file and the moving party has served a demand to arbitrate on the other party pursuant to a pre dispute contractual arbitration clause.

b. Petition to Confirm Award  [TOC]

In Cortez Chips v. Bill Harbert Const. Co., 529 U.S. 193 (2000) the Supreme Court held that, despite the language of 9 U.S.C. 9-11 identifying the location of the district court to confirm, vacate, modify or correct an award, any District Court can confirm, modify or vacate an arbitration award in conformity with the general venue statute of 28 U.S.C. 1391 (residence of any defendant, or where substantial performance of the contract occurred, or location of property). The Court held the FAA does not restrict a successful party from seeking confirmation of an award in a location other than the court in which the arbitrator filed the award. Venue is permissive rather than restrictive; Cortez Chips.

10. Selection of Arbitrators  [TOC]

a. Contractual Selection  [TOC]

Essential to the parties in arbitration is the impartiality of the arbitrator(s). One party cannot effectively control the selection process to achieve any advantage; McMullen v. Meijer, Inc., 355 F.3d 485 (6th Cir. 2004); Hooters of Am. v. Phillips, 173 F.3d 933 (4th Cir. 1999); Murray v. UF & CW Int. Union, 289 F.3d 297 (4th Cir. 2002).

If the contract specifies an arbitrator, or arbitration service provider, that choice must be enforced by the court or the parties risk vacatur of any award; Brook v. Peak Intern. Ltd, 294 F.3d 668 (5th Cir. 2002); Smith Barney, Inc. v. Critical Health Systems of No. Carolina, Inc., 212 F.3d 858 (4th Cir. 2000); In re Shareholders Derivative Litigation, 68 F.3d 554 (2d Cir. 1995).

Because arbitration is a matter of contract, the court must enforce terms of an agreement selecting an arbitrator. Failure of an arbitration service provider or other appointing authority to adhere to its own Rules violates the contract and the award is unenforceable unless the party seeking to vacate the award on these grounds fails to object; Brook v. Peak, Int., Ltd; contra. In R.J. O'Brien & Assocs., Inc. v. Pipkin, 68 F.3d 257 (7th Cir. 1995) the court regarded the departure from selection of arbitrators as "trivial."

In Bulko v. Morgan Stanley DW Inc., 450 F.3d 622 (5th Cir. 2006) the court distinguished between a "deviation"' from the contract and the terms prescribing the method of selection of arbitrators. The court reiterated the general rule that arbitration is a matter of contract and departure from the method of contract selection can violate the terms of the contract.

Note: Non-compliance with contractual arbitrator selection may support vacating an award on the grounds the arbitrator "exceeded powers;" 9 U.S.C. 10 (a) (4). See, Awards; Ch. V-D-4, infra.

In some cases, multiple arbitration clauses between parties identify different arbitrable fora to resolve a dispute. A court presumably has discretion to select; Bushley v. Credit Suisse First Boston, 360 F.3d 1149 (9th Cir. 2004). No appeal lies from this order; Augustea Impb Et Salvataggi v. Mitsubishi, 126 F.3d 95 (2d Cir. 1997).

If the parties are operating under the Rules of an arbitration service provider, and an arbitrator dies or is unable to continue before liability is established, the parties may have to begin anew unless the arbitration clause, or the Rules of the provider, authorize a method of substitution. But if the arbitrators issued an award after finding liability-but not damages-no replacement is necessary; Trade & Transport, Inc. v. Natural Petroleum Charterers, Inc., 931 F.3d 191 (2d Cir. 1991).

Practice: Bulko illustrates the importance of reading the contract to determine the method of selecting arbitrators. In many cases, an arbitration service provider prescribes selection of an arbitrator-unless the contract outlines its own method. In the absence of judicial intervention, i.e., a petition to compel arbitration, the parties will prepare a submission agreement. Selection of an arbitrator, and the method of selection of an arbitrator by an arbitration service provider, should be carefully reviewed.

The obvious solution to replace an arbitrator is to include a provision in the arbitration agreement to resolve this issue.

Cross Reference: Ch. XVIII, A,C. Selection of Arbitrators

b. Party Selected Arbitrators  [TOC]

Party arbitrators, i.e., arbitrators selected unilaterally by each party and not necessarily "neutral", sit with the neutral arbitrator, hear all the evidence and vote on the award. The value of party arbitrators is arguable as each is likely to be an advocate rather than an impartial decision maker; Delta Mine Holding Co. v. AFC Coal Props., Inc., 280 F.3d 815 (8th Cir. 2001); Sphere Drake Ins. LTD. v. All America Ins. Co., 307 F.3d 617 (7th Cir. 2002). The Eighth Circuit reaffimed the right of parties to select party arbitrators, and an award is not subject to vacatur of grounds of “evident partiality;” 9 U.S.C. 10 (a) (2); Winfrey v. Simmons Food, Inc., 495 F.3d 549 (8th Cir. 2007).
.

Aside from executing a "disclosure of interest", these arbitrators are frequently selected for their expertise in hearing complex cases-including legislation enacted for a public purpose, i.e., violations of the Sherman Act (15 U.S.C.1); JLM Inds., Inc. v. Stolt -Nielsen SA, 387 F.3d 163 (2d Cir. 2004). Winfrey v. Simmons Food, Inc., 495 F.3d 549 (8th Cir. 2007) holds party arbitrators are not required to disclose as long as their identity and “party” status is disclosed;

Note: For a case collecting opinions of other Circuits, see, U.S. Energy Corp. v. Nukem, Inc., 400 F.3d 822 (10th Cir. 2005).

Problems arise when one party arbitrator is disqualified, becomes sick, injured or dies during the arbitration; Wellpoint v. John Hancock Ins. Co., 576 F.3d 643 (7th Cir. 2009); United Transportation Union v. Gateway Western Ry., 284 F.3d 719 (7th Cir. 2002). Replacement is an option but not all courts agree on the appropriate process; Nat'l. Am. Ins. Co. v. Transamerica Occidental Life Ins. Co., 328 F.3d 462 (8th Cir. 2003).

Reference: Ch. V-D-2; Evident Partiality of Arbitrator

c. Arbitrator Disclosure  [TOC]

One ground for vacating an arbitration award is “evident partiality” of an arbitrator; 9 U.S.C .10 (a).The leading case interpreting this section  is Commonwealth Coatings v. Continental Casualty Co., 393 U.S. 145 (1968), a Supreme Court case casting a shadow on the “finality” of arbitration by permitting a non-prevailing party to challenge an award on grounds the arbitrator failed to disclose a business  relationship with one of the parties.  In Positive Software Solutions v. New Century Mortgage Corp., 476 F.3d 278 (5th Cir. 2007 en banc) [cert.den.] the court explains the absurdity of offering non-prevailing party challenges to awards on tenuous grounds, reminds lawyers that experienced and skilled counsel are likely to have significant contacts with other lawyers in certain specialties, and harshly criticizes the Ninth Circuit (“an outlier”) test that “evident partiality” is equivalent to a “mere impression of bias;” Schmitz v. Zilveti, 20 F.3d 1043 (9th Cir. 1994).
The Second Circuit spelled out a sensible rule in Lucent Techs., Inc.v. Tatung, 379 F.3d 24 (2d Cir. 2004) declining to vacate awards “because of undisclosed relationships where the complaining party should have known of the relationship just as easily before or during the arbitration rather than after it lost the case.”

Cross Reference: Ch. XIX-A-1: Disclosure by Arbitrator

See, Ch V-D-2; Awards; Evident Partiality of Arbitrator

11. Appointment of Arbitrator  [TOC]

Title 9 U.S.C. 5 provides, upon application of either party, for court appointment of an arbitrator or umpire if the contract does not provide for one, or an agreement provides for appointment and the parties cannot agree to an arbitrator or fail to "avail [themselves] of such method," or a vacancy occurs; Wellpoint v. John Hancock Ins. Co., 576 F.3d 643 (7th Cir. 2009). In Dockser v. Schwartzberg, 433 F.3d 421 (4th Cir. 2006) the parties agreed to arbitrate disputes in conformity with arbitration service rules but could not agree on the number of arbitrators. The court ruled the arbitration service provider should resolve these disputes, not the court.

In a dispute as to the selection of arbitrators, the court has no jurisdiction to intervene; Gulf Guarantee Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d 476 (5th Cir. 2004). The remedy is 9 U.S.C. 5, requesting the court to appoint an arbitrator. Motions to appoint an arbitrator prior to the hearing on the petition to compel arbitration are not reviewable as an interlocutory order. The motion to compel, or seek declaratory relief, is the appropriate procedure; Acequip LTD v. Am. Eng. Corp., 315 F.3d 151 (2d Cir. 2003).

When the parties file a motion to appoint an arbitrator, the rationale differs from a motion to compel arbitration. Title 9 U.S.C. 5 does not require a prior determination that the agreement to arbitrate is valid; or that any arbitration agreement exists at all; Acequip.

Cross Reference: Part II, Ch. XVIII-C.  California has a similar statute; CCP 1286.1.

Practice:  Agreeing on an arbitator is often a tedious and unpleasant task, particularly when no arbitrator service provider is named in the arbitation agreement.  To avoid this problem and its attendant delay, either designate a  particular party or service provider in the arbitration agreement. If the former alternative is exercised, the named arbitator may no longer be available at the time the dsipute matures.

12. Conduct of Arbitration [TOC]

The FAA sets forth few procedural guidelines for the conduct of an arbitration, presumably on grounds that the parties would be responsible for non judicial resolution of disputes. In the absence of any specific contractual terms for the conduct of the arbitration hearing, decisional law prevails.

a. Discovery   [TOC]

The only statutory authority for pre-arbitration discovery is 9 U.S.C. 7: The arbitrator(s) . . . may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document or paper which may be deemed material as evidence in the case . . .”

Although the FAA provides few statutory provisions for discovery, arbitration service providers may allow discovery by Rules, or parties may draft their own rules. If the court grants an order to compel arbitration, and stays litigation, all discovery in litigation should be stayed. In Halim v. Great Gatsby’s Auction Gallery, 516 F.3d 557 (7th Cir.2008) the court refused to vacate an award based on the arbitrator’s decision ordering the parties to complete discovery without his intervention.

Note: Circuit Courts disagree; See, Order Staying Litigation, this Chapter.

The general rule is that discovery in arbitration is limited, and submission to arbitration presumes an accumulation of procedural and evidentiary shortcuts otherwise available in litigation; Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Corp., 473 U.S. 614 (1985); In re Cotton Yarn Anti-Trust Litigation, 505 F.3d 274 (4th Cir. 2007) [anti-trust]; Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir.20060 [anti-trust]; Caley v. Gulfstream Aerospace Corp. [class actions], 428 F.3d 1359 (11th Cir. 2005); Prestige Ford v. Ford Dealer Computer Services, Inc., 324 F.3d 391 (5th Cir. 2003); Simula, Inc. v. Autoliv, Inc., 175 F.3d 716 (9th Cir. 1999). But arbitrators should give each party an opportunity to present their evidence and argument; Hoteles Condado Beach v. Union De Tronquistas Local 901, 763 F.2d 34 (1st Cir. 1985).

In Simula, the court held that any discovery could be conducted on a petition to compel arbitration only if the "making of the agreement or the failure, neglect or refusal to perform the same be in issue;" 9 U.S.C. 4. In Application of Matter of Deiulemar Compagnia Di Navigazione v. M/V Allegra, 198 F.3d 473 (4th Cir. 1999) the court permitted discovery under "extraordinary circumstances" (admiralty case).

See also: Oblix, Inc. v. Winiecki, 374 F.3d 488 (7th Cir. 2004); Boomer v. AT & T Corp., 309 F.3d 404 (7th Cir. 2002); Sandvik AB v. Advent Int. Corp., 220 F.3d 99 (3d Cir. 2000). The Second Circuit has held that discovery by the court is appropriate to determine whether collateral estoppel is applicable to a prior arbitration award; PenneCom B.V. v. Merrill Lynch & Co., 372 F.3d 488 (2d Cir. 2004).

In order to "vindicate statutory claims," in actions alleging breach of federal statutes and subsequently ordered into arbitration, the court might, in conjunction with other limitations on Claimant's remedies, find discovery limitations "unconscionable" (a defense against arbitration applied by the California Supreme Court in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000). In Booker v. Robert Half Intern., Inc., 413 F.3d 77 (D.C. Cir. 2005) the court permitted discovery in an employment case in order to comply with the phrase used by the Supreme Court in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) that arbitration must enble a claimant to "vindicate statutory rights."

In Britton v. Co-op Banking Grp., 916 F.2d 1405 (9th Cir. 1990) the Ninth Circuit held that a party who refused to comply with discovery orders-and was found in contempt- and defaulted, was entitled to compel arbitration without loss of jurisdiction. Default is an appealable order.

In any event, statutory relief for failure to order discovery is not listed in a motion to vacate an award; 9 U.S.C. 10: (a)(2).."arbitrators . . . refusing to hear evidence pertinent and material to the controversy". None of the provisions of vacatur apply to judicial limitations on discovery as a ground for appeal with the possible exception of Halim v. Great Gatsby’s Auction Gallery, 516 F.3d 557 (7th Cir. 2008).

Discovery to compel production of documents from a third party prior to a hearing is subject to a circuit split.  In Life Receivables Trusts v. Syndicate 102 @ Lloyd’s of London, 549 F.3d 210  (2d Cir. 2008) the court held 9 U.S.C. 7 is explicit and no such arbitrator authority exists.

b. Discovery in Collateral Litigation  [TOC]

If a court grants a motion to compel an arbitrable claim, and stays litigation (9 U.S.C. 3), but one of the parties to the arbitration seeks discovery in a collateral case for use in the arbitration, should the arbitrator issue a subpoena for records in the litigated case? Griffith v. University Hosp., LLC, 249 F.3d 658 (7th Cir. 2001); Comsat Corp. v. NSF, 190 F.3d 269 (4th Cir. 1999) [on a showing of “special need or hardship”].

In Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976 (6th Cir. 2003) the court held that settlement communications are privileged and not subject to disclosure in litigation. Presumably this rule also applies to negotiations prior to arbitration.

Cross Reference: California allows limited statutory discovery in arbitration; CCP 1283.05. In employment arbitration, employees have expanded discovery rights; Armendariz v. Foundation Health & Psychcare Services, Inc., 24 Cal.4th 83 (2002); Little v. Auto Stiegler, Inc., 29 Cal.4th 1064 (2003).

Practice: Discovery is closely related to subpoena power and is discussed below.  Note also that in California state courts the FAA may preempted local restrictions on discovery; See, e.g.  residential homes, notice and format requirements, construction requirements in Ch. XX-H.  

s.  

c. Arbitrator Authority  [TOC]

1.) Remedial Powers  [TOC]

Bowen v. Amoco Pipeline Co., 254 F.3d 925 holds that arbitrators have broad powers, and if the arbitration agreement authorizes any "remedy or relief allowed by state law," the arbitrators can award accordingly (punitive damages).

Comment: In most cases, an objection to remedial relief ordered by an arbitrator will be challenged by a motion to vacate on grounds the arbitrator exceeded powers or manifestly disregarded the law. See, Awards, Ch. V-D-4; F, infra.

Cross Reference: California allows the arbitrator broad power to award relief not necessarily restricted by statutory or common law remedies; Advanced Micro Devices, Inc. v. Intel Corp., 9 Cal.4th 362 (1994).

2.) Subpoena Power   [TOC]

Unless otherwise authorized by the parties or Rules of an arbitration service provider, subpoena power of an arbitrator over non-parties derives solely from the Federal Arbitration Act; 9 U.S.C. 7. "The arbitrators may summon in writing any person to attend before them as a witness in a proper case to bring with him or them, any book, record, document or paper which may be deemed material as evidence in the case."

The statute authorizes arbitrators to issue subpoenas with the same authority as general subpoenas and non-compliance is punishable upon petition to the court. A district court order to compel compliance with a subpoena, or an order denying a motion to quash, is not a "final decision" qualifying as an appealable order; Stolt-Nielsen S.A. v. Celanese AG, 430 F.3d 567 (2d Cir.2005).

The Second Circuit apparently distinguished Stolt-Nielsen in Dynegy Midstream Services v. Trammochem, 451 F.3d 89 (2d Cir. 2006) by characterizing a subpoena issued by an arbitrator as an "administrative, or agency subpoena"-not a civil subpoena-but a self-contained court proceeding and subject to appeal as a final decision pursuant to 9 U.S.C. 16 (a) (3). The court also noted that the statute only authorizes arbitrators to issue subpoenas, not parties.

This statute (9 U.S.C. 7) requiring a non party to bring items "with him (to the arbitration)," is unambiguous and does not authorize pre-arbitration production of documents of a non-party; Hay Group, Inc. v. E.B.S Acquisition Corp., 360 F.3d. 404 (3d Cir. 2004); Comsat Corp. v. NSF, 190 F.3d 269 (4th Cir. 1999); contra, In re Security Life Ins. Co. of America, 228 F. 3d 865 (8th Cir. 2000).

The Second Circuit has permitted arbitrators to issue "non-discovery" subpoenas for non-party witnesses to bring documents and give testimony prior to a merits hearing, e.g.,  preliminary issues; arbitrability; statutes of limitations; proper parties; preserve status quo; issues of privilege; authenticity and admissibility of documents; Stolt-Nielsen S.A.; 9 U.S.C. 7. The court also states that arbitrators may impose injunctive relief.

 

Cross Reference: Whether arbitrators can authorize injunctive relief is an open question but in Broughton v. Cigna Health Plans of Cal., 21 Cal.4th 1066 (1999) the court suggests they lack this authority. Arbitrators can issue subpoenas pursuant to CCP 1282.6.

3.)  Summary Judgment [TOC]


Whether to grant a motion for summary judgment is not addressed in the FAA, but in the absence of a restriction in the submission agreement the arbitrator[s] is empowered to grant the motion;  Sherrock Bros. v. DaimlerChrylser, 2008 WL 66300 (3d. Cir.) [Non.Pub.].  And, says the Sherrock court, in the absence of any issues of material fact, the arbitrator does not need to hold an evidentiary hearing.

Note: A motion for summary judgment filed in litigation-even in conjunction with a motion to compel arbitration and stay the litigation-may constitute a waiver of the right  to compel and stay; Kahn v. Parsons Global Services LTD, 521 F.3d 421 (D.C. Cir. 2008). 

d. Arbitration Hearing  [TOC]

Although the FAA does not require any evidentiary standards in an arbitration, basic fairness should allow the parties to present their evidence, cross examine witnesses, etc. An arbitration hearing should not be “fundamentally unfair, but only requires notice, opportunity to be heard, the opportunity to present relevant and material evidence and a panel of unbiased arbitrators; Lewis v. Circuit City Stores, Ind., 500 F.3d 1140 (10th Cir. 2007). “Arbitrators enjoy wide latitude in conducting an arbitration hearing and they are not constrained by formal rules of procedure or evidence.  An arbitrator need not consider all the evidence the parties seek to introduce but may reject evidence that is cumulative or irrelevant;” Rosensweig v. Morgan Stanley& Co., Inc., 494 F.3d 1328 (11th Cir. 2007) enying an oral hearing is not grounds for reversal; Sovak v. Chugai Pharmaceutical Co., 280 F.3d 1266 (9th Cir. 2002).

Reference: Objections to the conduct of the arbitrator or the hearing are raised as a ground of appeal to vacate an award.  See, Ch. V-D-1-2-3.

Cross Reference: Ch. XX: Conduct of Arbitration

13. Immunity of Arbitrator   [TOC]

Federal case law, including the Ninth Circuit, approves immunity from litigation for arbitrators when serving in that capacity; Rolon v Henneman, 517 F.3 140 (2d Cir. 2008).  International Med. Grp. v. AAA, Inc., 312 F.3d 833 (7th Cir. 2002) ["bad faith" arbitration]; New England Cleaning Services, Inc. v. AAA,199 F.3d 542 (1st. Cir. 1999) [CBA]; Honn v. NASD, Inc., 182 F.3d 1014 (1999) [NASD]; Wasyl, Inc. v. First Boston Corp., 813 F.2d 1579 (9th Cir.1987).

Unless a clear absence of jurisdiction exists, immunity extends even to corruption of the arbitrators; Int. UAW v. Greyhound Lines, 701 F.2d 1181 (6th Cir.1983).

Arbitrator immunity extends to sponsoring organizations; Corey v. New York Stock Exchange, 691 F. 2d.1205 (6th Cir. 1982); International Med. Grp.

Cross Reference: California law is in accord: Stasz v. Schwab, 121 Cal.App.4th 420 (2004). But an arbitrator who abandons his role is not entitled to immunity; Morgan Phillips, Inc. v. JAMS/Endispute, 140 Cal.App.4th 795 (2006).

14. Appeal from Judgment after Award  [TOC]

Appeal from a judgment confirming an arbitration award is severely limited to statutory grounds listed in the FAA; 9 U.S.C. 16. Although parties can draft their own contractual terms, they cannot confer jurisdiction on Circuit Courts of Appeal by including a term authorizing appeal; Kyocera Corp. v. Lapine Tech. Corp., 341 F.3d 987 (9th Cir. 2003). See, Comment below.

"Manifest Disregard" of the law is also a non-statutory ground for appeal but also severely limited in application. See, Chapter VI, Appeal, for further discussion on these topics, infra.

Cross Reference: California formerly strictly limited the right to appeal from a judgment on grounds of legal error in confirming an award unless the parties draft an arbitration clause expressly requiring appeal; Cable Connection, Inc. v. DIRECTV, Inc, 44 Cal.4th 1334 (2008). In 2008 the court reversed this rule in Cable Connection.

15. Drafting Arbitration Clauses  [TOC]

The FAA enforces arbitration whether parties enter into either a pre-dispute or post-dispute written agreement "evidencing a transaction involving [interstate] commerce". The United States Supreme Court has repeatedly stated that arbitration is a matter of contract. Negotiating parties can draft their own agreement to include arbitrable issues, procedural rules for the conduct of the arbitration and agree on potential remedies but terms cannot be illegal, hinder or prevent the principle of arbitration, inhibit or foreclose statutory rights, Volt Info. Sciences, Inc. v. Leland Stanford, Jr. Bd. Of Trustees, 489 U.S. 468 (1989). When contacts are adhesive, or unilaterally imposed, any "agreement" is potentially subject to revocation or denial of enforcement by the court.

Practice: Drafting Petitions to Compel: In Conrad v. Phone Directories, Co., Inc., 585 F.3d 1376 (10th Cir. 2009) the court explained the confusion arising from a caption entitled “Motion to Dismiss” as distinct from a “Petition to Compel Arbitration.” If a party  captions the former on the papers, the court will not substitute the latter regardless of the text.  To avoid mis interpretation, the court prefers “bright lines.”

See, Unconscionable Contracts, Ch. IV-G-2, a infra.

Cross Reference: Unconscionable Contracts: Part II; XVII-C-4.

Practice: Arbitration is a matter of contract.  Here is a sample of a comprehensive arbitration clause to resolve disputes: “any controversy, dispute or claims under, arising out of, in connection with or in relating to this  agreement, including the negotiation, interpretation, construction , coverage, scope, performance, non-performance, breach, termination, validity or enforceability of this agreement.”

Note: Some categories require specific rules for enforcement of arbitration clausses.  Usually these are not subject to the preeptive scope of the FAA.  See, below

Neither the FAA nor the CAA set forth the terms of the arbitration clause in the contract.  Arbitration is a matter of contract and the parties can negotiate their own terms.   In adhesive contracts, the terms are seldom negotiable.

Subjects for discussion in drafting agreements include:

Whether to arbitrate under the CAA or the FAA.  If the arbitration clause authorizes resolution of any dispute of a contract in “interstate commerce” the FAA will trump a choice of law clause unless the parties agaree to apply state law; Volt Info. Sciences v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468 (1989);

Selection of a choice of law; Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2005); Best Interiors, Inc. v. Millie & Severson, Inc., 161 Cal.App.4th 1320 ( 2008);

Whether the choice of law includes substantive and/or procedural law;

Selection of a forum (venue) to conduct the arbitration;

Use of the Rules of an arbitration service provider.  Many providers have drafted industry specific rules or general rules for the conduct of proceedings;

Arbitrator vacancy.  Provide for replacement in the event a pre- selected arbitrator dies, becomes  injured or is otherwise unavailable.  In the alternaativae, the parties can agree to an arbitratiion service provider and select from their list of arbitrators. Also consider selection of a replacement for an arbitrator unable to continue after the proceedings have begun;Wellpoint v. John Hancock Ins. Co., 2009 WL 2431995 (7th Cir. 2009).

Notice to arbitrate and service of notice;

The scope of the arbitration clause, either broad or narrow;

The parties and their legal capacity;

Extent of discovery (particularly in employment cases).  Other than personal injury and wrongful death cases, the CCP allows no discovery; CCP 1283.05; 1283.1;

Whether to provide for appeal under the auspices of an arbitration service provider.  The Supreme Court has ruled that under the FAA the parties cannot provide for appellate review other than under the statutory provisions; Hall Street Associates, LLC v. Mattel, Inc., 128 S.Ct. 1396 (2008).  The California rule is directly opposite, overruling several Court of Appeal cases; Cable Connection, Inc. v. DirecTV, 44 Cal.4th 1334 (2008). But an arbitration service provider can offer parties the right to appeal to a panel of arbitrators; Cummings v. Future Nissan, 128 Cal.App.4th 321 (2005).

Whether to include a severance clause of any terms held unenforceable;

Whether to require “negotiations” (meet & confer)prior to arbitration, noting the vagueness of this term;

Whether to require mediation prior to arbitration (Ev. Code 1115-1128; CRC 3.850) and impose penalties for non compliance;

Whether to include any  conditions precedent to arbitration.  The most common is a requirement that the parties mediate their dispute initially.

Whether to include any administrative remedies as a condition precedent;

Remedies awardable to the prevailing party.  The clause must enable a claimant to vindicate statutory rights and remedies;

Costs, fees, pre and post judgment interest;

Consult the CRC and the local Superior Court Rules.

Award:  require the arbitrator to issue a “reasoned” award (mandatory in employment cases) or a “bare” award.  Consider the potential of future disputes between the parties and the effect of res judicata and collateral estoppel on the effect of the award;

Arbitrator: a single arbitrator or a panel? The parties can self-select one of the panelists (party arbitrators), select independently, or select from an arbitration service provider panel.

Judgment on the award should be enforecable in any court of competent jurisdiction.

Note that some categories of disputes are governed by specific statutes in cases removed from state courts if the alleged breach is of a contract performed in interstate commerce:

Health Services Plans:  H & S 1363.1 (Cal.) governs binding arbitration in health service plans and its requirement for disclosure: Rodriguez v. Blue Cross of Cal., 162 Cal.App.4th 330 (2008) collects all the cases on this subject.
Medical  Services:  CCP 1295 (Cal.) statutorily describes contracts between physicians and clients as non-adhesive and sets forth language to be included in the agreement between the parties.

Note: Arbitration Service Provider Rules, decisional law and statutory provisions (CCP 1281.9) applicable to employment, consumer and franchise agreements should be consulted in these categories. Although the parties may commence litigation in state court, the other party may remove to federal court on grounds of diversity if the transaction is in interstate commerce and the plaintiff alleges claims in excess of the $75,000.00 minimum for jurisdiction.

Comment: Counsel have attempted to expand appellate jurisdiction of a federal court or, in some cases, to restrict it. Circuit Courts of Appeal were conflicted on this topic. See, Ch. V, Awards; Ch. 6-A-1, Appeal. The Supreme Court has resolved the issue: the FAA is the exclusive ground for appeal of awards; Hall St. Associates, LLC v. Mattel, 128 S.Ct 1396 (2008);

Cross Reference:   California rejects the Ninth Circuit rule denying expansion of the right to appeal; Cable Connection, Inc. v. DirectTV, 44 Cal.4th 1334 (2008)
 See, Awards, Ch. XXI.

Practice:  If plaintiff files a Complaint, and the court grants a petition to compel arbitration, the parties may stipulate the pleadings serve as “claims” in arbitration.  Any admissions in the pleadings may arguably bind the plaintiff in arbitration; Valerio v. Andrew Youngquist Construction, 103 Cal.App.4th 1264 (2002). 

Pleading & Motion Practice

The FAA offers the opportunity  to eliminate pleading defects and motions, unless the parties agree to incorporate these categories in the arbitration clause. The FAA makes no provision for civil procedure and California prohibits discovery except in personal injury and wrongful death cases.  But in most commercial cases the parties include a dispute resolution clause specifically incorporating discovery. 

Yet counsel must be careful in exchanging causes of action (or “claims” in federal court”) for submission of claims to arbitration.  Arbitration claims are subject  to rewording or amendment and the Respondent can file cross claims without demurrers and motions to strike.. Motions for summary judgment are allowed but under strict circumstances (See, Summary Judgments).

In federal court, a defendant in a litigated case usually seeks to compel arbitration by filing summary judgment or declaratory relief referencing the arbitration clause in the contract.  This issue is a question of law and no jury is required  (If no litigation is on file, the moving party can move to compel arbitration in federal court only if diversity jurisdiction exists.)  But if the defendant files a motion to dismiss the complaint without any reference to arbitration, the court in Wabtec Corp. v. Faiveley Transport Malmo AB, 525 F.3d 135 (2d Cir. 2008) held the court lacks jurisdiction to order arbitration and denial of the motion is not an appealable order under 9 U.S.C. 16(a) (1)(c).  Contra, Fit Tech v. Bally Total Fitness Holding Corp., 374 F.3d 1. (1st Cir. 2004).

Chapter IV. Initiating Arbitration: Federal Court  [TOC]

A. Doctrine of Preemption   [TOC]

The Federal Arbitration Act (FAA) is an unequivocal endorsement of commercial arbitration and provides, in part, "A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to

perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract;" 9 U.S.C. 2.

The Supremacy Clause and Commerce Clause of the United States Constitution invest Congress with power to regulate interstate commerce; Moses H. Cone Mem. Hosp. v. Mercury Const Co., 460 U.S. 1 (1983); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395. Implementing these Constitutional provisions, the FAA preempts any state or local anti-arbitration law; 9 U.S.C. 1-16; Southland Corp. v. Keating, 465 U.S. 1(1984). Thus, the initial decision for a federal court (or any state court) hearing a motion to compel arbitration is whether the FAA preempts any substantive state law, judicial decision or administrative regulation singling out commercial arbitration for treatment other than that applicable to contract law in general; Fidelity Federal S & L Ass'n. v. de la Cuesta, 458 U.S. 141 (1982); Doctor's Assoc. v. Casarotto, 517 U.S. 681 (1996) [state law required arbitration clause to be highlighted]; Perry v. Thomas, 482 U.S. 483 (1987) [state law prohibited arbitration of wage claims]; Southland Corp. v. Keating [state law prohibited arbitration of franchise agreements]; Aceros Prefabricados, S.A. v. TradeArbed, Inc., 282 F.3d 92 (2d Cir. 2002) [state law cannot impose a higher burden of proof in reviewing arbitration clauses than required under general contract law]; Bradley v. Harris Research, 275 F.3d 884 (9th Cir. 2001) [venue]; Doctor's Assocs., Inc. v. Hamilton, 150 F.3d 157 (2d Cir. 1998).

The FAA applies to any arbitration agreement within its scope whether in state or federal court. Not all state law is preempted, but includes those judicial decisions, statutes, or adminstrative agencies inhibiting or preventing achievement of the twin goals of the FAA: overcoming judicial hostility to arbitration and enforcing contracts according to their terms; Preston v. Ferrer, 128 S.Ct. 978 (2008); Volt Information Sciences, Inc. v. Leland Stanford Jr. Bd. of Trustees, 489 U.S. 468 (1989); Vera v. Saks & Co., 335 F.3d 109 (2d Cir. 2003)[CBA]; Chevron U.S.A., Inc. v. Hammond, 726 F.2d 483 (9th Cir. 1984).

Although the FAA preempts State substantive anti-arbitration law, there is no federal policy favoring arbitration under a set of specific procedural rules. If state procedural law facilitates arbitration, rather than obstructing the process, the objectives of the FAA are not compromised; Volt Information Sciences, Inc.; New England Energy, Inc. v. Keystone Shipping Co., Inc., 855 F.2d (1st Cir. 1988).

When a choice of law clause in an arbitration agreement references state law, courts are split on whether local procedural law is preempted; First Fidelity Bank, FSB v. Durga Ma Corp., 386 F.3d 1306 (9th Cir. 2004); Security Ins. Co. of Hartford v. TIG Ins. Co., 360 F.3d 322 (2d Cir. 2004).

Cross Reference: ); Discover Bank v. Sup.Ct., 36 Cal.4th 148 (2005); .Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2005). See, Jevne v. Sup.Ct., 35 Cal.4th 935 (2005) [conflict preemption]; Rosenthal v. Great Western Fin. Securities Corp., 14 Cal.4th 394 (1996).

Note: FAA preemption is a judicially declared doctrine as distinguished from conflict preemption displacing state law; U.S. v. Locke, 529 U.S. 89 (2000); English v. Gen. Electric Co., 496 U.S. 72 (1990); Boomer v. AT & T, 309 F.3d 404 (7th Cir. 2002).

The doctrine of preemption, phrased as federal policy, prevents states from undermining arbitration, either procedurally, substantively or administratively; Preston v. Ferrer, 128 S.Ct. 978 (2008). Volt held that California procedural rules did not undermine arbitration under a local choice of law rule. In Palcko v. Airborne Express, 372 F.3d 588 (3d Cir. 2004) the court held the FAA inapplicable to plaintiff under federal law, but in her agreement with the other party she had agreed that if the court found the FAA inapplicable, a state arbitration rule would apply. Exercising pendant jurisdiction over plaintiff's claim, the court allowed arbitration to proceed under the state statute.

See, Preemption in Part II, Ch. XIII

Cross Reference: Cronus, supra, Sanders v. Kinko's, Inc., 99 Cal.App.4th 1106 (2002) [state rules for consolidation of arbitration and litigation, or stay of arbitration, not preempted].
See, Sonic-Calabasas A, Inc. v. Moreno, 174 Cal.App.4th 606 (2009)  

FAA pre empts state labor law hearings.

Note: ERISA preempts all state employee retirement regulations and confers exclusive jurisdiction on federal courts; Aetna Health, Inc. v. Davila, 542 U.S. 200 (2004).

The scope of the preemption doctrine includes the statute of limitations. The relevant state statute may be borrowed for a federal claim, but federal law governs the time the cause of action accrues; PaineWebber, Inc., v. Faragalli, 61 F.3d 1063 (3d Cir. 1995).

See, Labor Arbitration & Preemption, Ch. I-G.

B. Federal Policy  [TOC]

The FAA reflects a federal public policy favoring arbitration as an alternative means of dispute resolution, and arbitration clauses in contracts are construed broadly, resolving any doubts in favor of arbitration; Moses H. Cone Mem. Hosp. v. Mercury Const. Co., 460 U.S. 1 (1983). Claims founded on statutory rights, in addition to common law rights, are subject to arbitration unless the party opposing arbitration establishes Congressional intention to mandate a judicial forum for resolution of the statutory right at issue; Gilmer v. Interstate Johnson/Lane Corp., 500 U.S. 20 (1991).

The United States Supreme Court held in Mitsubishi Motors Corp. v. Soler Chrysler Plymouth, Inc., 473 U.S. 614 (1985) that any objection to arbitration, and the inapplicability of the FAA, must be reflected by Congressional action in the text of a specific statute, legislative history, or evidence that an inherent conflict exists between arbitration and the statute's underlying purposes; Shearson/American Exp., Inc. v. McMahon, 482 U.S. 220 (1987) [ Commodity Exchange Act, 7 U.S.C. 6]; Marchese v. Shearson Hayden Stone, Inc., 734 F.2d 414 (9th Cir. 1984). But a "party cannot be required to submit to arbitration any dispute [to] which he has not agreed;" AT&T Technologies v. Comm. Workers of America, 475 U.S. 475 (1986).

The burden is on the party seeking to avoid arbitration to establish that Congress rejected federal policy favoring arbitration; Gilmer. Arbitration clauses in federal court are enforceable in commercial arbitration as long as the claimant can vindicate statutory rights otherwise available in litigation; Gilmer.

C. Presumption of Arbitrability   [TOC]

When the existence or terms of the arbitration clause are not in dispute, or, even if the language of the arbitration agreement is ambiguous or vague, a presumption of arbitrability applies. If the issue is whether the parties agreed to arbitrate in the first instance, the presumption is reversed; First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995); AT & T Techs., Inc. v. CWA, 475 U.S.643 (1986).

D. Standing  [TOC]

Courts distinguish "jurisdictional" standing required under Article III ("case or controversy") and "contractual" standing, i.e., a party contests terms of an arbitration clause; Lloyd. v. Hovensa, LLC, 369 F.3d 263 (3d Cir. 2004). "Standing" is often associated with non signatories to a contract and whether they can enforce its terms; Pa. Psychiatric Soc. v. Green Spring Health Services, Inc., 290 F.3d 278 (3d Cir. 2002). In re Prudential Ins. Co. of America Sales Practice Litigation All Agents Actions, 133 F.3d 225 (3d Cir. 1998); compare, Britton v. Co-op Banking Grp., 916 F.2d 1405 (9th Cir.1990).

A more difficult issue is the decision whether a contract between certain parties exists. The “standing” question is procedual, i.e., an an arbitrator decision, but the “existence” of a contract is a judicial one; Environmental Barrier Co. LLC v. Slurry Sysems, Inc., 540 F.3d 598 (7th Cir. 2008).

Jurisdictional standing under Art. III limits federal courts to "cases and controversies." Private arbitration panels are obviously not federal courts and unaffected by Article III; McDonald v. City of West Branch, 466 U.S. 284 (1984); Klay, M.D. v. United Health Grp., Inc., 376 F.3d 1092 (11th Cir. 2004). Howsam v. Dean Witter Reynolds, 537 U.S. 79 (2002) expands the power of arbitrators to resolve procedural issues but jurisdictional issues are typically resolved by the court.

"Standing" can also refer to "capacity" of a party to appear in court, i.e., is the particular plaintiff entitled to an adjudication of the claims asserted. This issue arises under derivative claims-as distinct from individual claims-alleging common law, statutory or Constitutional violations. In diversity actions, state substantive law on "standing" prevails; Gen. Tech. Applications, Inc. v. Exro Ltd, 388 F.3d 114 (4th Cir. 2004).

E. Arbitrability: Ordering Arbitration  [TOC]

Introduction:

Petitions (or applications) under the FAA follow the rules of motion practice; 9 U.S.C. 6. Typically the petition to compel arbitration (9 U.S.C. 3) sets forth the agreement directly or incorporates the document by reference, is accompanied by a memorandum of points and authorities and counsel's declaration; MS Dealer Service Corp. v. Franklin, 177 F.3d 942 (11th Cir. 1999); Nauru Phosphate Royalties, Inc. v. Drago-Daic Interests, Inc. 138 F.3d 160 (5th Cir. 1998). Pursuant to 9 U.S.C. 4 the party seeking arbitration files a petition seeking an "order directing that . . . arbitration proceed in the manner provided for in [the arbitration] agreement."

Absent a Complaint filed in federal court alleging a federal claim, original jurisdiction of state originated litigation is conferred on the federal court by diversity of the parties (28 U.S.C. 1331; 1332). The party seeking to enforce an arbitration clause frequently files a motion for summary judgment, or declaratory relief, and simultaneously seeks an order from the District Court staying litigation (originally filed in state court but removed) and seeks an order to arbitrate. Motions for summary judgment on the validity and enforcement of the arbitration clause are resolved similarly to summary judgment motions in general (Fed. R. Civ. Pro. 56).

Whether to order arbitration is a question of law, i.e., "arbitrability", and under 9 U.S.C. 4 a jury trial is required but only if there is a triable issue of fact concerning the existence or scope of the agreement; Sat. Eve. Post Co. v. Rumbleseat Press, 816 F.2d 1191 (7th Cir.1987). The opposing party must establish material facts are in issue-not just a general denial; Tinder v. Pinkerton Security, 305 F.3d 728 (7th Cir.2002). The validity and enforcement of an arbitration clause is a question of law, and in ruling on a motion for summary judgment, the court may order the case to an arbitrable forum without a jury; American Heritage Life Ins. Co. v. Orr, 294 F.3d 702 (5th Cir. 2002).

Practice: As above, all applications to the court under the FAA are heard in the manner provided by law for the making and hearing of motions; 9 U.S.C. 6.

Practice:  The FAA does not specifically authorize a petition to compel arbitration but in the absence of litigation on file a party seeks an order to compel arbitration.  If litigation is on file, the party files declaratory relief (or summary judgment) seeking an order to determine the existence and scope of an arbitration agreement between the parties and is enforceable; and seeks an order to stay litigation.
In California courts, the jurisdictional issue of the FAA is absent and the moving party merely files a petition to compel arbitration as authorized by the CAA.  

Cross Reference: See, Ch. XV: Initiating Arbitration in State Court

1. Severing Merits from Arbitration Clause   [TOC]

In First Options of Chicago v. Kaplan, 514 U.S. 938 (1995) the Supreme Court confirmed that in determining "arbitrability", i.e., whether to order arbitration, the trial court examines only the arbitration clause itself, not the merits of the underlying dispute. In Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) the Court had held that allegations of fraud inducing the contract are a "merits" issue for the arbitrator; Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) confirmed this rule.

First Options decides “who” should resolve enforcement of the arbitration clause and “who” should decided the merits of the dispute.  But the Ninth Circuit held that the court must decide which one, i.e., the court or the arbitrator, should  resolve arbitrabilitiy; Jackson v. Rent-A-Center West, Inc., 581 F.3d 912 (9th Cir. 2009)  In making that decision, the court can determine whether the arbitration clause itself is unconscionable

The Supreme Court granted cert. and reversed.   The Court explained that arguments over the arbitration clause, its formation and enforcement, were judicial issues but if the plaintiff argues the contract as a whole, which includes the arbitration clause, is unconscionable the arbitrator decides.  If the contract explicitly assigns enforcement of the arbitration clause to the arbitrator, that term will be enforced; Rent-a-Center West, Inc. v. Jackson, 130 S.Ct. 272 (2010).  

The court can resolve a fraud allegation only if a party challenges the arbitration clause, not the contract itself; Snowden v. CheckPoint Check Cashing, 290 F.3d 631 (4th Cir. 2002); Burden v. Check Into Cash of Ky. LLC, 267 F.3d. 483 (6th Cir. 2001). This dichotomy has resulted in the doctrine of "separability" and led to further distinctions between a contract void at its inception and voidable contracts; Buckeye; Snowden v. CheckPoint Cashing.

(Backstory) If the opposition argues no contract "exists" ab initio, the doctrine of separability is inapplicable; Snowden v. Check Point Cashing [lack of "mutual assent"); Sphere Drake Ins. Ltd. v. All American Ins. Co., 256 F.3d 587 (2d Cir. 2001) [forgery; contract "void" ab initio]; Spahr v. Secco, 330 F.3d 1266 (10th Cir. 2003) [mental incapacity]; or, in some cases, if the party lacked authority to enter into a contract [agency]; Large v. Conseco Finance Servicing Corp., 292 F.3d 49 (1st Cir. 2002); Three Valleys Municipal Water District v. E.F. Hutton & Co., Inc., 925 F.2d 1136 (9th Cir.1991); ACEquip Ltd v. Am. Eng. Corp., 315 F.3d 151 (2d Cir.2003) [discussing distinction between judicial determination of whether a contract "exists"-although in the context of appointment of an arbitrator and not in a petition to compel arbitration. In Primerica Life Ins. Co. v. Brown, 304 F.3d 469 (5th Cir. 2002) the question whether plaintiff lacked "mental capacity" to consent was a decision for the arbitrator. In Sphere Drake, the court held the issue is a judicial one.

In Will-Drill Resources, Inc. v. Samson Resources Co., 352 F.3d 211 (5th Cir. 2003) [parties contended they had not signed the contract] the court attempted to synthesize competing principles: the "existence" of an arbitration agreement vs. the continuing validity of that agreement if fraud induced the arbitration clause. Buckeye attempted to resolve the issue of arbitrability by classifying challenges to the validity of the arbitration clause and whether an enforceable contract exists.  The Ninth Circuit explains the difference between an action to rescind or avoid a contract as distinct from challenges to the existence of the contract; the latter question is for the court; Sanford v. Memberworks, Inc., et al., 483 F.3d 956 (9th Cir. 2007); Three Valleys.

Practice: Distinguish whether a contract "exists" and whether an arbitration agreement "exists," and, if so, which parties are bound by one or the other; Microchip Tech., Inc. v. U.S. Philips, Corp., 367 F.3d 1350 (Fed.Cir. 2003) rejecting Teledyn v. Kane, Corp., 892 F.2d 1404 (9th Cir. 1989).

The Prima Paint rule requires the court to resolve only the arbitration provision ("the making of the agreement") and defers to the arbitrator in deciding the merits of the dispute. Challenges to the arbitration clause on grounds of adhesion, unconscionability, duress and lack of mutuality are defenses against arbitration. Not all state and federal courts characterize these doctrines as substantive decisions for the court, but the Ninth Circuit has held that the court decides whether the contract that contains the arbitration clause is adhesive; Nagrampa v. Mailcoups, Inc., 469 F.3d 1256 (9th Cir. 2006)[franchise contract; Jenkins v. First American Cash Advance of Ga., LLC, 400 F.3d 868 (11th Cir. 2005) [consumer loan].

Comment: Nagrampa was severely criticized by dissenting judges, arguing the holding of the majority that the arbitration clause is unenforceable is only a subterfuge for attacking the entire agreement (of which the arbitration clause is only a part).

The FAA refers to the “making of the agreement” to arbitrate.  And California assigns to the court the determination of whether the “agreement” exists.  The problem arises when a party challenges the contract itself continuing the arbitration clause.  If the parities never agreed to signing the contract, the court should determine that issue.  But if the parties did sign the contract but one party alleges deception in the execution, and seeks rescission, the court should make this determination although a “merits” decision. See, Will-Drill Resources, Inc. v. Samson Resources Co., 352 F.3d 211 (5th Cir. 2003).

Cross Reference: The Supreme Court does not distinguish fraud inducing a contract from fraud in the execution as do the California courts;  Rosenthal v. Great Western Financial Securities Corp., 14 Cal.4th 394 (1996); Hotels Nevada v. L.A. Pacific Ctr., Inc., 144 Cal.App.4th 754 (2006).  Fraud in the inducement consists of deceiving a party to obtain a signature; fraud in the execution deceives a party into signing a different agreement than promised.  This distinction may coincide with Buckeye, although that case involved allegations of an illegal contract.

In Dream Theater, Inc. v. Dream Theater, LLC, 124 Cal.App.4th 547 (2004), according to the court, the essence of the challenged agreement was to arbitrate although the language of the agreement was similar to indemnity; Dream Theater holds that the court must initially decide whether the parties agreed the arbitrator should decide "arbitrability."

New York: Weinrott v. Carp, 32 N.Y.2d 190 (1973) separates arbitrability of the arbitration clause from the merits, conforming New York law to federal law;

Practice: A preliminary three step process in reviewing the arbitration clause is outlined in Solvay Pharmaceuticals v. Duramed Pharmaceuticals., Inc., 442 F.3d 471 (6th Cir. 2006):  1.) Disagreement on the issue of liability or damages ("merits" of the dispute); 2.) disagreement  on whether they agreed to arbitrate (arbitrability); 3.) disagreement  on who should decide the issue of arbitrability, i. e. judge or arbitrator). See, Drafting Arbitration Clauses, Ch. III-A-15, supra.

Note: In resolving the formation of an arbitration clause, the court applies general state law of contracts. Accordingly, federal courts will differ on contract formation applicable in different states; Solvay Pharmaceuticals, Inc. v. Duramed Pharmaceuticals, Inc., 442 F.3d 471 (6 th Cir.2006).

Practice: The Ninth Circuit has created an analytical problem for lawyers and courts in resolving the issue of fraud alleged in a Complaint originally filed in state court and removed.  According to the majority, the court may consider the entire contract when determining an allegation of fraud or unconscionability; Nagrampa v. Mailcoups, Inc.. 469 F.3d 1257 (9th Cir. 2006).  In dissent, the minority opinion comments that Buckeye rebuts this conclusion, and a court may only consider the arbitration clause itself even if the plaintiff alleges an unconscionable clause in the Complaint.

2. Burden of Proof  [TOC]

The burden of proving an arbitration clause exists is on the moving party but "the most minimal indication of the parties' intent to arbitrate must be given full effect"; Televisa S.A. v. DTVLA, Inc., 374 F.3d 1384 (9th Cir. 2004) [subsequently withdrawn]; Rep. of Nicaragua v. Standard Fruit Co., 937 F.2d 469 (9th Cir. 1991).

3. Evidentiary Hearing  [TOC]

The court must determine whether the parties "agreed" to arbitration. If the evidence is conflicting, the court must hold an evidentiary hearing; Will-Drill Resources, Inc. v. Samson Resources Co., 352 F.3d 211 (5th Cir. 2003). In Deputy v. Lehman Bros., 345 F.3d 494 (7th Cir. 2003) the appellate court required the trial court hearing a petition to compel arbitration to initially hold a Daubert hearing (Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 [(1995]) to determine "admissibility" of disputed evidence (expert testimony) before conducting a trial-court or jury-as required by 9 U.S.C. 4.

Comment:  In most cases, a federal court will resolve the “agreement” to arbitrate on the papers filed in support of the motion to compel arbitration if litigation is on file.  Or. if a party files a motion for declaratory relief or summary judgment the question becomes one of law.  In any event, the procedure should be summary and expeditious; Moses H. Cone Memorial Hospital v. Mercury Construction Corp. 460 U.S. 1 ( 1983).

4. Incorporation of Documents  [TOC]

Documents can be incorporated by reference in an arbitration clause, but these cases tend to be fact-specific and "incorporation " is a question of substantive state law; Fit Tech, Inc. v. Bally Total Fitness Holding Corp., 374 F.3d 1 (1st Cir. 2004); R.J.O'Brien & Assocs. v. Pipkin, 64 F.3d 257 (7th Cir. 1995). The more specific the reference to the document[s] the more likely the court will incorporate; Progressive Cas. Ins. Co. v. C.A. Reaseguradora Nationale de Venezuela, 991 F.2d 42 (2d Cir. 1993).

Arbitration clauses can be incorporated even if the relevant incorporation language does not refer to it; World Rentals & Sales, LLC v. Volvo Construction Equipment Rentals, 517 F.3d  1240 (11th Cir). Again, fact specific.

Additional terms of a contract not specifically incorporated by reference may impliedly be incorporated under the doctrine of "trade usage" (custom and practice in an industry) and does not constitute a material alteration of the contract; In re Cotton Yarn Anti-Trust litigation, 505 F.3d 274 ( (4th Cir. 2007); Aceros Prefabricados, S.A., v. TradeArbed, Inc., 282 F.3d 92 (2d Cir. 2002); MS Dealer Service Corp., v. Franklin, 177 F.3d 942 (11th Cir. 1999); Nauru Phosphate Royalties, Inc. v. Draco-Dais Industries, Inc., 138 F.3d 160 (5th Cir. 1998).

Apparently in some states an arbitration clause is a material alteration of the contract.

Cross Reference: Under California law, the terms of an incorporated agreement must be easily available to contracting parties; Slaught v. Bencomo Roofing Co., 25 Cal.App.4th 744 (1994). Incorporation may occur in a secondary document; Chan v. Drexel Burnham Lambert, Inc., 178 Cal.App.3d 632 (1986). See, Ch. XVI-F-4-c: Incorporation of Documents.

See, Industry Practices, This Chapter IV-E-7.

Note: The arbitration agreement may also incorporate arbitration rules of an arbitration service; Dream Theater, Inc. v. Dream Theater, 124 Cal.App.4th 547 (2004);

5. Prior Arbitration & Subsequent Arbitration  [TOC]

The court must identify issues subject to arbitration, but if the moving party contends a prior arbitration is admissible in the instant arbitration, that question is for the arbitrator; Pike v. Freeman, 266 F.3d 78 (2d Cir. 2001); Nat. Union Fire Ins. Co. of Pitt., Pa. v. Belco Petroleum Corp., 88 F.3d 129 (2d Cir.1996).

6. Prior Arbitration and Subsequent Litigation  [TOC]

If the issue arose in litigation, it must be identical to that in arbitration, actually litigated and crucial to the judgment; Clark v. Bear Stearns & Co., Inc., 966 F.2d 1318 (9th Cir. 1992).

An example of evidence of a prior arbitration is the ability of a Title VII plaintiff to litigate after an adverse decision in a grievance pursuant to a CBA. In McDonald v. City of West Branch, Mich., 466 U.S. 284 (1984) the Supreme Court discussed the issue in detail. The key point is the adequacy and accuracy of the prior arbitral decision.

Note: This issue should be distinguished from res judicata or collateral estoppel. See,these Sections, infra. The issue is an evidentiary one, i.e., is the award in a prior arbitration admissible in subsequent litigation between the same parties. In res judicata and collateral estoppel, the issue is preclusion of an issue or claim to prevent subsequent litigation.

See, Collateral Estoppel & Res Judicta, This Chapter-J.

7. Industry Practices  [TOC]

The court may consider industry practices which inform the contract-at least in a CBA dispute; Line Drivers et al. v. Roadway Express, 152 F.3d 1098 (9th Cir. 1998); Analogously, evidence is admissible of any industry practice in support of a decision to order arbitration; Genesco, Inc. v. T. Kakiuchi & Co. LTD, 815 F.2d 840 (2d Cir. 1987).

F. Arbitrability: Interpreting the Arbitration Clause  [TOC]

The Supreme Court has characterized the validity and enforcement of the arbitration clause pursuant to 9 U.S.C. 4 as the doctrine of "arbitrability." To determine whether ..." the making of the agreement for arbitration is . . . in issue, . . . the FAA authorizes federal courts to apply a substantive law of "'arbitrability'". If the validity and enforcement of the arbitration clause is not in issue, the court stays litigation and orders arbitration. Unless the arbitration agreement specifically authorizes the arbitrator to rule on this issue, the trial court must determine "arbitrability"; First Options of Chicago v. Kaplan, 514 U.S. 938 (1995); U.S.C. 3/4.

First Options presumes the parties would select a court to determine the issue of “arbitrability.” But in some cases the parties may explicitly agree to empower an arbitrator to decide the issue of arbitrability (to avoid any judicial intervention) by incorporating this alternative. The court must respect that decision if the agreement clearly and unmistakably evidences that intent; Contec Corp. v. Remote Solution, Co. Ltd, 398 F. 3d 205 (2005). Arbitration agreements are valid and enforceable, but under the terms of the FAA, the trial court must determine whether any legally cognizable defect occurs in the "formation" of a clause, i.e., the "making of the agreement;" 9 U.S.C. 2.

In Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) the Supreme Court held that arbitrability includes "gateway" issues including existence of the arbitration clause, scope of issues, and parties subject to arbitration. Federal courts apply state general contract law in determining formation of the arbitration clause.

The trial court conducts a hearing and if the court is satisfied that "the making of the agreement for arbitration or the failure to comply therewith is not in issue. . ., [it] can order the arbitration to proceed according to the terms of the agreement;" 9 U.S.C. 4. The court must consider whether the "making of the agreement" authorizes an order to arbitrate (and stay litigation); 9 U.S.C. 4. The issues are:

Whether the parties agreed to arbitrate (existence of the agreement);

The parties bound by the agreement (applicability);

Whether the underlying dispute falls within the terms of the agreement (issues and scope).

1. Agreement to Arbitrate   [TOC]

a. Existence of Arbitration Clause/Contract   [TOC]

In determining whether the parties have agreed to arbitrate (the "making of the agreement"), the court-not the arbitrator-must decide the issue in the first instance unless the parties have specifically contracted for an arbitral determination; Preston v. Ferrrer, 128 S.Ct. 978 (2008); First Options of Chicago, Inc. v. Kaplan, supra; O'Neil v. Hilton Head Hosp., 115 F.3d 272 (4th Cir. 1997).

The doctrine of "arbitrability includes a judicial determination of "who" did the parties agree upon to interpret the arbitration clause (judge or arbitrator); whether an agreement "exists;"  Sanford v. Memberworks, Inc., et al., 483 F.3d 956 (9th Cir.2007);  Lifescan, Inc. v. Premier Diabetic Services, Inc., 363 F.3d 1010 (9th Cir. 2004]; Chiron Corp. v. Ortho Diagnostic Sys. Inc., 207 F.3d 1126 (9th Cir. 2000); whether the parties “agreed to arbitrate in the first instance;" First Options of Chicago v. Kaplan, 514 U.S. 938 (1995); U.S.C. 3;4; Coady v. Ashcraft and Gerel, 223 F.3d 1 (1st Cir. 2000). Ordering arbitration depends on the language used (if any) in the agreement referring to the forum, i.e., arbitrable or judicial, for resolution of a dispute; Shaw Grp., Inc. v. Triplefine Int. Corp., 322 F.3d 115 (2d Cir. 2003).

One statement of judicial responsibility on this issue is reflected in Riley Manufacturing Co. v. Anchor Glass Container Co., 157 F.3d 775 (10th Cir. 1998). In Riley, the court said " implementing the strong national policy favoring resolution of commercial disputes through arbitration, ". . . the question of "arbitrability"-whether a [contract] creates a duty for the parties to arbitrate the particular grievance-is undeniably an issue for judicial determination . . .unless the parties agree otherwise."

If the parties agree that the arbitrator-not the court-should decide "arbitrability", the appellate court must accord the same respect to an arbitrator's decision as to any other arbitral decision; Poweragent v. Electronic Data Systems, 358 F.3d 1187 (9th Cir. 2004).

Comment: The jurisdictional rule (between a judicial or arbitral forum) separating the arbitration clause from the merits of the underlying dispute, assigning to the court the issue of arbitrability (gateway issues), and to the arbitrator the merits of the dispute, has caused considerable confusion. In Match....v. Kean-Argovitz Resorts, LLC, 383 F.3d 512 (6th Cir. 2004) the court identified three challenges to the arbitration clause: void (non existent clause); void ab initio (lack of signatory authority; lack of mutual assent); voidable (term waived by option of party). The dissent sets out the distinctions but eventually concedes that a statutorily illegal contract is not an issue of contractual "existence" or lack of signatory authority, and is therefore enforceable.

Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), and First American Cash Advance of Ga., LLC, 400 F.3d 868 (11th Cir. 2003), attempted to resolve the distinction between the "existence" of the contract and the "content" of the arbitration agreement.

The doctrine of "severability" of the arbitration clause from the merits applies in state and federal courts; Buckeye. "The issue of the contract's validity is different from the issue of whether any agreement between the alleged obligor and obligee was ever concluded. Our opinion today addresses the former;" Buckeye. This distinction attempts to clarify the confusion created in cases cited above which fail to make this distinction.

In Granite Rock Co. v. International Brotherhood of Teamsters, 130 S.Ct. 2847 (2010) the Supreme Court against struggled with determining “when” the contract was formed, i.e. ratified by a labor union, and concluded the court should decide this issue.    

Despite efforts by the Supreme Court to analytically separate the arbitration clause from the contract itself, determining who resolves what issues remains. In Cox v. Ocean View Hotel Corp., 539 F.3d 388 (9th Cir.) the panel majority decided  waiver of the right to arbitrate was a judicial issue, not an arbitral issue.    

Practice: As noted earlier, a motion for summary judgment to compel arbitration is a question of law for the court.
 
Cross Reference: Ch. XVI-F-3; Existence of Agreement to Arbitrate

b. Objections to Arbitrability [TOC]

A party may object to arbitrating  a dispute on several grounds, i.e., it is not a party to the arbitration agreement;  not involved in the disputed issues; object to the scope of the arbitration.
In other contexts, a party can object to arbitration on grounds of substantive or procedural arbitrability, an adhesive contract, or other grounds described below. Although the Supreme Court has held the trial court must determine whether a dispute is “arbitrable,” many arbitration service providers include a clause stating the arbitrator will determine the validity and enforceability of the agreement.  Usually the AAA or JAMS  Rules are cross referenced in the arbitration clause and the question becomes whether these Rules trump; Awuah v. Coverall of North America, 554 F.3d 7 (9th Cir. 2009.
See, this Chapter, F-11; Arbitrator Service Provider Rules

Whatever the objection, a party must raise it at the earliest time and repeat the objection prior to the hearing and at the hearing; First Options of  Chicago v. Kaplan, 524 U.S. 938 (1995). But a party cannot await the outcome and then later argue the arbitrator lacked authority to decide the matter; Lewis v. Circuit City  Stores, Inc., 500 F.3d 1140 (10th Cir.2007).

c. Expired Contracts   [TOC]

Fixed term contracts usually contain an arbitration clause applicable to disputes arising during the contract period. But if a party files a claim (or litigation is filed) after the contract has expired, the court nonetheless must determine whether the parties agreed to
arbitrate identifiable issues, and whether the particular dispute in question falls within the scope of the arbitration agreement even if contract interpretation, i.e., expiration, is normally the responsibility of the arbitrator; Lambert v. Austin Ind., 544 F.3d 1192 (11th Cir. 1192) [retaliatory termination]; Litton Financial Printing Div. v. NLRB, 501 U.S. 190 (1991); Nissan N.A. v. M'Lady Oldsmobile, 307 F.3d 601 (7th Cir. 2002); Riley Manufacturing Co., Inc., v. Anchor Glass Container Corp., supra; Aspero v. Shearson-American Express, Inc., 768 F.2d 106 (6th Cir.1985) [NASD].
But see Microchip Tech., Inc. v. U.S. Philips Corp., 367 F.3d 1350 (Fed. Cir. 2004 ) collecting conflicting case law from the Ninth Circuit.
Once a court determines "expiration" is an issue, the arbitrator determines whether the underlying contract has expired; ACEquip LTD v. American Engineering Corp., 318 F.3d 157 (2d Cir. 2003).

d. "Stand Alone" Clauses in Contracts  [TOC]

In some cases, arbitration clauses "stand alone" as distinct from a clause included as part of a broader agreement; Nagrampa v. Mail Corps, Inc., 469 F.3d 1257  (9th Cir. 2006) Employment contracts often contain references to separate handbooks requiring employees to agree to arbitration; Am. Heritage Life Ins. Co. v. Lang, 321 F.3d 533 (5th Cir. 2003); Patterson v. Tenet Healthcare, Inc., 113 F.3d. 832 (8th Cir. 1997) [employee signed handbook and returned it to the employer]; Kummetz v. Tech Mold, Inc., 152 F.3d 1153 (9th Cir.1998) [separate information booklet not referenced in contract]; Berkley v. Dillard's, Inc., 450 F3d 775 (8th Cir. 2006) [accepted arbitration by continued employment].

Patterson concludes that the handbook is not a contract, lacking offer, acceptance and consideration, but qualifies as an arbitration clause. Courts test arbitration clauses separately from the contract and are enforceable without qualifying as a "contract." The court in Hill v. Peoplesoft, USA, 412 F.3d 540 (5th Cir. 2005) used a different analysis and construed solely the arbitration agreement, not the handbook.

Considerable litigation exists, predominately fact specific: whether the employee received the arbitration clause; or signed the handbook; or the employment agreement references the handbook; or whether the handbook (or the employment agreement ) references jury waiver.

Cases are fact specific and contingent upon state substantive law of contract formation; Campbell v. Gen. Dynamics Govt.Systems Corp., 407 F.3d 546 (1st Cir. 2005).

See, Arbitration Issues & Scope, Ch. IV, E, 3  (this Chapter)

e. Implied Agreement to Arbitrate  [TOC]

Despite the absence of a written agreement, the conduct of a party may be implied to enforce an arbitration clause; Pike v. Freeman, 266 F.3d 78 (2d Cir. 2001).

f. Incomplete Agreement to Arbitrate  [TOC]

Absence of an identification of the forum, location to arbitrate, and allocation of costs, does not invalidate the arbitration clause; Blinco v. Green Tree Servicing LLC, 400 F.3d 1308 (11th Cir. 2005).

g. Breach of Arbitration Agreement  [TOC]

In most cases a plaintiff, or claimant, alleges breach of contract and the defendant files a petition to compel arbitration. But in Brown v. Dillard's, Inc., 430 F.3d 1004 (9th Cir. 2005) the defendant, after having removed the case to federal court, refused to participate in arbitration on grounds the claim was "baseless" despite claimant's request for arbitration as set forth in her employment agreement. Claimant filed suit and won damages for breach of the arbitration agreement.

Comment: The court ruled, in effect, that a party seeking arbitration must do so consistent with the equitable doctrine of "clean hands."

2. Arbitrable Parties  [TOC]

Judicial determination of arbitrable parties included in the arbitration agreement is a question of "arbitrability" and addressed in conformity with the general rule that ambiguities are resolved in favor of arbitration; Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). According to Dean Witter Reynolds, Inc. v. Howsam, 537 U.S. 79 (2002) designation of parties governed by the arbitration clause is a "gateway" issue for the court. In a contract among multiple parties, the arbitration clause may not include, or exclude, certain parties from arbitration.

Practice: At the hearing to compel arbitration, the moving party should submit an order specifically identifying those parties bound by the arbitration clause as found by the court if the motion is granted. In some cases, third parties may be bound by their legal relationship to the instant parties, i.e., agents and employees.

If litigation is on file, the Complaint identifies the parties but the court must determine whether all those named in the Complaint are subject to an arbitration clause in the contract and whether the interests of others are affected.

Research Note: In some cases a signatory to a contract containing an arbitration clause seeks to compel a non-signatory to join in the arbitration. In other cases, a non-signatory petitions the court to participate in arbitration with a signatory. As the CD Partners v. Grizzle, 424 F.3d 795 (8th Cir. 2005) court said: "it makes a difference."

See, Ch. XVI F-5: Signatory and Non-Signatory Parties

The test for a willing non-signatory seeking to arbitrate with a signatory does so under an estoppel theory and the court considers the relationship of persons, wrongs, and issues, but a willing signatory seeking to arbitrate with a non signatory who resists must comply with the list of factors discussed below in Thomson-CSF, S.A. v. AAA, 64 F.3d 773 (2d Cir. 1995). See, This Section-b-, below.

a. Third Parties  [TOC]

Arbitration is a matter of contract and a party cannot be required to submit a dispute to arbitration in the absence of an agreement to do so; AT &T Technologies v. CWA, 475 U.S. 643 (1986). Under general contact principles, signatories to a contract containing an arbitration clause are bound by its terms, but in some cases non-signatories (third parties) are bound even in the absence of a written agreement between the parties. In another category, a non-signatory attempts to join an arbitration with a signatory and other parties.

Because the FAA applies only to formation and revocation of contracts, resolution of non-signatory participation in an arbitration is governed by state law unless preempted as inconsistent with the FAA; Fleetwood Enterprises, Inc. v. Gaskamp, 280 F.3d. 1069 (5th Cir. 2002 [children of parents not bound by contract]. The Fifth Circuit is not so sure; JP JPMorgan Chase & Co. v. Conegie ex rel. Lee, 492 F.3d 596 (5th Cir. 2007).

Another category involving third parties includes a contract containing an arbitration clause with some parties but not others. All are discussed below.

b. Signatory Enforcing Contract Against Non-Signatory  [TOC]

A signatory attempting to compel a non signatory to participate in arbitration must rely on the terms of the agreement; Hill v. G.E. Power Systems, Inc., 282 F.3d 343 (5th Cir. 2002). But other contractual doctrines are applicable if claims are integrally related; or rely on the same operative facts; or facts inherently inseparable; Hill. For example, documents incorporated by reference; Denney v. BDO Seidman LLP, 412 F.3d 58 (2d Cir. 2005); Thomson-S.A. v. AAA, 64 F.3d 773 (2d Cir. 1995). Or a non signatory is attempting to enforce provisions to its own benefit; Becker v. Davis, 491 F.3d 1292 (11th Cir. 2007).

Becker points out that even if a non signatory is bound by the arbitration clause, the court must also determine whether the claims are within the scope of the agreement; accord, World Rentals & Sales, LLC v. Volvo Construction Equipment Rentals, 517 F.3d 1240 (11th Cir.)[“affiliates” of signatory not included].

The absence of a signatory to the contract is not dispositive.   A signatory may rely on one of the following contract theories to compel a non-signatory to participate in arbitration; Choctaw Generation Ltd, PP v. American Home Assurance Co., 271 F.3d 403 (2d Cir. 2001):

Sureties: AgGlow Oils LLC v. Natl. Union Fire Ins. Co., 242 F.3d 777 (8th Cir. 2001);

Trade doctrine: Aceros Prefabricados, S.A. v. Tradearbed, Inc., 282 F.3d 92 (2d Cir. 2002);

Assumption of benefits: in this category, a party who receives a benefit from an  arbitration agreement cannot subsequently avoid arbitration; Blinco v. Gree Tree Servicing, LLC, 366 F.3d 1249 (11th Cir. 2004); MAG Portfolio Consultant, GMBH. v. Mervin Biomed. Grp., LLC, 268 F.3d 58 (2d Cir. 2001). This doctrine is known as equitable estoppel and operates to estop a party from avoiding arbitration; Bouriez v. Carnegie Mellon Univ., 359 F.3d 292 (3d Cir. 2004); Grigson v. Creative Arts Agency, 210 F.3d 524 (5th Cir. 2000); Hill; Merrill Lynch Inv. Mgrs. v. Optibase, 337 F.3d 125 (2d Cir. 2003). Signatories (and non-signatories) may compel arbitration with other parties to avoid litigation; or, may seek to stay parallel litigation; Hill.

Agency: The most obvious category of signatories demanding non-signatories to participate in arbitration lies in principles of agency or fiduciary relationship; Thompson S.A. v. AAA; Choctaw, 271 F.3d 403 (2d Cir 2001; Long v. Silver, 248 F.3d 309 (4th Cir. 306 [shareholders]. In re Prudential Ins. Co. of America, 133 F.3d 225 (3d Cir.1998); Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753 (11th Cir. 1993); Letizia v. Prudential Bache Securities., 802 F.2d 1185 (9th Cir. 1986); JP Morgan Chase & Co. v. Conegie ex rel. Lee, 492 F.3d 596 (5th Cir. 2007)).

An agent of a disclosed principal is ordinarily not liable for the acts of an entity. A party who signs in a representative capacity can neither be held liable in litigation against the principal nor compelled to submit to arbitration if a clause exists in the underlying contract; McCarthy v. Azure, 22 F.3d 351 (1st Cir. 1994).

Comment: Whether an agency relationship exists is a question of law as to the "formation" of contract in the sense of identifying arbitrable parties; Sphere Drake Ins., Inc. LTD v. All American Life Ins. Co., 307 F.3d 617 (2002). Under principles of agency, most federal courts conclude that one party can seek to enforce claims under the contract against another party who is not a signatory to a contract; Britton v. Co-Op Banking Grp., 916 F.2d 1405 (9th Cir. 1990) The difficult question is whether or not this is a question of state law or federal substantive law. The doctrine is essentially one of estoppel, not formation or validity of a contract, and therefore federal substantive law prevails (Washington Mut. Fin.Grp. v. Bailey, 364 F.3d 260 [5th Cir. 2004]; cf., Flink v. Carlson, 856 F.2d 44 [8th Cir.1988]) but in a diversity case the federal courts are required to adhere to state substantive law.

Alter Ego: Thomson-SA v. AAA, above. State law determines whether alter ego applies; Carter v. Health Net of Ca., Inc., 374 F.3d 830 (9th Cir. 2004) [ERISA case].

Assignees: Duties or liabilities assumed by assignee; Trippe Mfg. Co. v. Niles Audio Corp., 401 F.3d 529 (3d Cir. 2005). The Ninth Circuit requires an express assumption of liabilities of an assignor; Britton v. Co-Op Banking Grp., 4 F.3d 742 (1993); The New York rule is the same; Rose v. AmSouth Bank of Florida, 391 F.3d 63 (2d Cir. 2004).

The Eighth Circuit has held the valididty of an assigment called into question by a party must be resolved by the court as it questions whether a contract “exists;” resolution is governed by state law;” Koch v.Compucredit Corp., 543 F.3d 460 (8th Cir. 2008).

An assignee is usually not a signatory to the contract containing the arbitration clause. Given the relationship between the parties, the court should either join the assignee in the litigation, or the assignee should be compelled to participate in the arbitration.

Receivers: Receivers stand in the shoes of the business entity signatory to the arbitration clause and can be compelled to arbitrate; Javitch v. First Union Secs., 315 F.3d 619 (6th Cir. 2003). Washington Mut. Fin. Grp. LLC v. Bailey, 364 F.3d 260 (5th Cir. 2004). The extent of their authority to arbitrate claims may be limited; Liberte Cap. Grp., LLC v. Cadwill (6th Cir. 2007).

Estoppel: The Ninth Circuit has identified two lines of cases involving equitable estoppel: Non signatories may be compelled to arbitrate if they knowingly exploit the agreement to arbitrate; signatories may be compelled to arbitrate by a non signatory if the parties have a close relationship with the entities involved; Comer v. Micor, Inc., 436 F.3d 1098 (9th Cir. 2006).

A]pplication of equitable estoppel is warranted . . .when the signatory to the contract containing the arbitration clause raises allegations of ... substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract; PRM Energy, Inc. v. Premenergy, LLC, 592  F.3d 830 (8th Cir. 2010).   

The court may enjoin a party attempting to avoid arbitration who joins non-signatories if the relationship of the persons, wrongs and issues is absent; Hill; contra; DSMC, Inc. v. Convera Corp., 349 F.3d 679 (D.C. Cir. 2003) [jurisdictional grounds].

Comment: These cases tend to be fact specific. Analyzing the language of contracts in cases other than described above (agency, etc.) is important to determine whether the arbitration clause was part of the agreement between the parties; Wachovia Bank, N.A. v. Schmidt, 445 F.3d 762 (4th Cir. 2006).

c. Non-Signatory Enforcing Contract Against Signatory  [TOC]

Equitable estoppel, as distinct from collateral estoppel, is a doctrine that allows a non signatory to compel a signatory to arbitrate if the issues asserted by the former are "intertwined;" Denney v. BDO Seidman, LLP, 412 F.3d 58 (2d Cir. 2005); JLM Industries, Inc. v. Stolt-Nielsen SA, 387 F.3d 167 (2d Cir. 2004). Or, when benefits are conferred on a third party under the arbitration agreement; MS Dealer Service Corp. v. Franklin, 177 F.3d 428 (11th Cir. 1999). The Ninth Circuit reviews the law on this subject in Mundi v. Union Security Life Ins. Co., 555 F.3d 1042 (9th Cir. 2009).

Jurisdiction:  The Sixth Circuit has raised an appellate jurisdiction argument:  9 U.S.C.1 of the FAA requires a “written” document.  When a non signatory attempts to join a signatory there is no “writing,” and in Carlisle v. Curtis Mallet-Prevost, Colt & Mosle, LLP, 521 F.3d 597 (6th Cir. 2008) the court held appellate jurisdiction to review any interlocutory order staying litigation and compelling arabitration and joinder was never raised.  Cert. Grtd., 129 S.Ct. 529 (2008). 

The Supreme Court reversed.  In Andersen LLP v. Carlisle, 129 S.Ct. 1896 (2009) a non signatory petitioned the court to stay litigation and compel arbitration of a contractual dispute between signatories whose contract contained an arbitration clause.  Federal Arbitration Act (FAA) 9 U.S.C. 2 empowers courts to order arbitration and 9 U.S.C. 3 enables the court to stay litigation. These sections are the relevant jurisdictional statutes and nothing prohibits a third party from seeking a stay of the litigation and compel joinder with signatories pursuant to the doctrine of “equitable estoppel.”  The merits of the non signatory case, a separate issue, are governed by state contract law including the validity, revocability and enforceability of contracts generally.    

A non signatory who attempts to enforce the benefits of a contract cannot avoid the burdens, one of which is arbitration; Blinco v. Green Tree Servicing, LLC, 366 F.3d 1249 (11th Cir. 2004); non-signatory agents of  a corporation can invoke the arbitration clause of signatory corporation;  Tracinda Corp. v. DaimlerChrysler AG, 2007  WL 2701965 [distinguishing Pritzger v. Merrill Lynch et al., 7 F.3d 1110 ((3d Cir. 1993) and E.I. Dupont de Nemours & Co. v. Rhone Poulenc, 269 F.3d 187 (3d Cir. 2001).

See, Ch. VI-A: Appellate Jurisdiction

In Poweragent, Inc. v. Electronic Data Systems Corp., 388 F.3d 1187 (9th Cir. 2004) the court invoked the doctrine of judicial estoppel in litigation, i.e., a litigant may not benefit by making directly contradictory arguments regarding the same dispute in different tribunals. This rule should be applicable in arbitration.

Cross Reference: Part II, XVI-F-5-l,  Judicial Estoppel

Note: The procedural rules of the FAA apply in District Court, not state law of contract formation, in determining whether a non-signatory can compel arbitration of a signatory; International Paper Co. v. Schwabedissen, et al., 206 F.3d 411 (4th Cir. 2000).

Cross Reference: State law; Non-signatories; Alliance Title Co. v. Boucher, 127 Cal.App.4th 262 (2005). See, Ch. XVI-F-5-g.

A non signatory attempting to enforce an arbitration clause is usually characterized as an obligee beneficiary as distinct from a direct beneficiary of the contract; Nationwide Ins. v. Home Insurance Co., 150 F.3d 545 (6th Cir. 1998) [surety]; Kvaerner ASA v. Bank of Tokyo- Mitsubishi, Ltd, 210 F.3d 262 (4th Cir. 2000) [guarantor]; Telectronics Pacing Systems, Inc. v. Guidart Corp., 143 F.3d 428 (8th Cir. 1998) [assignees]. A party not subject to an arbitration clause in an agreement between other parties may seek a stay of litigation filed against it until the arbitration is concluded if the operative facts are intertwined with the arbitration; Harvey v. Joyce, 199 F.3d 790 (5th Cir. 2000).

The most common means for a non signatory to prevent its participation pursuant to an arbitration clause is to file an injunction.

Cross Reference: Federal courts may also enforce an arbitration award against third parties (guarantors, assignees, sureties) pursuant to principles of collateral estoppel and res judicata, but California law permits collateral estoppel of an arbitration award only against the arbitrating parties unless the arbitration agreement provides otherwise; Vandenberg v. Sup. Ct., 21 Cal.4th 815 (1999).

d. Arbitrable & Non-Arbitrable Claims  [TOC]

The most difficult issue for the court is resolving an arbitration clause as to one (or more) parties but not to others. If the court orders the arbitrable parties to arbitration, and does not stay the litigation, the potential for conflicting results is obvious. In Dean Witter Reynolds, Inc. Byrd, 470 U.S. 413 (1985), a two party contract, the Supreme Court ordered arbitration as to the arbitrable issues but refused to stay litigation of non-arbitrable claims on grounds the parties' agreement must be enforced.

See, Ch.II-E-1,2: Arbitrable and Non-Arbitrable Claims

In Puerto Rico Telephone Co., Inc. v. U.S. Phone Co. 427 F.3d 21 (2005) the court reached a practical result by ordering arbitrable claims to arbitration and staying litigation of non-arbitrable claims.  In Volkswagen of America, Inc. v. Sud’s of Peoria, Inc., 474 F.3d 966 (7th Cir. 2007) the Seventh Circuit reviewed Circuit decisions and, in effect, distinguished Byrd by holding that District Court rulings were discretionary.

Comment:  Federal courts are clearly struggling with the Byrd decision.  Ordering arbitration of some claims and not others, or with some parties and not others, invokes inconsistent decisions, the role of res judicata and collateral estoppel and the inordinate confusion of  law and fact.  California confronted the same problem and resolve it similarly-the trial court has discretion to rule; CCP 12812 (c ).

Cross Refrence: Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2005).  See also , Valencia v. Smyth, 185 Cal.App.4th 153 (2010). 

e. Mischaracterization of Parties   [TOC]

In examining the scope of the arbitration clause, the court must determine whether specific parties are included within its terms. In McCauley v. Halliburton Energy Services, Inc., 413 F.3d 1158 (10th Cir. 2005) the arbitration clause covered employees of the defendant but plaintiff was properly characterized as an independent contractor and not within the scope of the arbitration agreement.

f. Indemnity  [TOC]

Indemnity sought against a third party is a question of "issues" and "parties" but the court should render the initial ruling on the petition to compel arbitration absent delegation to the arbitrator. Indemnitors are usually not a signatory to the contract litigated by another party but can compel arbitration of an indemnification claim in some circumstances. The parties may not be aware of this issue until after arbitration commences; Contec Corp. v. Remote Solution Ltd, 398 F.3d 205 (2005). In which case the arbitrator must decide; Pike v. Freeman, 266 F.3d 78 (2d Cir. 2001).

3. Arbitrable Issues & Scope   [TOC]

"Arbitrability" also includes determining whether a particular claim falls within the scope of the arbitration agreement and is another example of a "gateway" issue; Howsam v. Dean Witter Reynolds, 537 U.S. 29 (2002). In the event of any ambiguity, the presumption of arbitrability will prevail; Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967); Moses H. Cone Memorial Hospital v. Mercury Const. Corp., 460 U.S. 1 (1983); In re Prudential Ins. Co. of America, 133 F.3d 225 (3d Cir.1998). In resolving that issue, the court focuses on the factual allegations in the Complaint rather than the legal causes of action asserted; Specht v. Netscape Communications, 306 F.3d 17 (2d Cir. 2002); Simula, Inc. v. Autoliv, Inc., 175 F.3d 716 (9th Cir. 1999). If the allegations underlying the claim "touch matters" covered by the parties to the contract, those claims must be arbitrated, whatever the legal label attached to them; Mitsubishi Motors v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985). Or, as stated in Cara's Notions, Inc. v. Hallmark Cards, Inc., 140 F.3d 566 (4th Cir. 1998) whether there are "any aspects of the relationship between the parties."

"Any doubts concerning the scope of arbitral issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay or a like defense to arbitrability"; Moses H. Cone; Harvey v. Joyce, 199 F.3d 790 (5th Cir. 2000); Nat. Union Fire Ins. Co. of Pittsburgh, Pa. v. Belco Petroleum Corp., 88 F.3d 129 (2d Cir.1996).

If the court concludes that certain claims are outside the scope of the arbitration clause, severance of arbitral and non-arbitrable claims is necessary. In this instance, claims not subject to arbitration must be litigated. If the court retains jurisdiction (or remands to state court) the judge may stay federal litigation until conclusion of the arbitration.

Case law on the scope of the arbitration clause is often fact specific and depends on the language drafted by the parties. Courts have divided arbitration clauses into categories of broad and narrow clauses; Klay v. All Defendants, 389 F.3d 1191 (11th Cir. 2004); Genesco v. Kakiuchi Co., Ltd, 815 F.2d 840 (2d Cir. 1987).

a. Broad Clauses  [TOC]

"[T]o determine whether a particular dispute falls within the scope of an arbitration clause, the court may classify the clause as 'broad' or 'narrow'. If 'broad', even collateral matters will be ordered to arbitration if the claims alleged involve issues of contract construction of a party's rights and obligations under it;" Personnel Sec. & Safety Systems, Inc. v. Motorola, 297 F.3d 388 (5th Cir. 2002); Simula, Inc. v. Autoliv, Inc., 175 F.3d 716 (9th Cir. 1999).

Comment: The judicial focus is not on the merits of the case, but the arbitration clause itself: Prima Paint Corp. v. Flood & Conklin Mfg. Co. (above); Highlands Wellmont Health Network, Inc. v. John Deere Health Plan, Inc., 350 F.3d 568 (2003); Fazio v. Lehman Bros., Inc., 340 F.3d 386 (6th Cir. 2003) [fraud complaint must stand apart from the arbitration agreement]; Deputy v. Lehman Bros., Inc., 345 F.3d 494 (7th Cir. 3003); [whether a tort claim (arising out of the contract) is reasonably foreseeable is irrelevant]; Although contract law dominates, torts "arising out of an alleged breach" are subject to arbitration; Simula, Inc.; Hudson v. Con Agra Poultry Co, 484 F.3d 496 (8th Cir. 2007);  CD Partners, LLC v. Grizzle, 424 F.3d 795 (8th Cir. 2005) reviews several cases of arbitration clauses judicially interpreted to include torts.

Hemispherx Biopharmical, Inc. v. Johannesberg Consol. Inv., 553 F.3d 1351 (11th Cir. 2008)  explains the difficulty in distinguishing between terms of pre dispute agreements and ongoing business relationships.

In another example of distinguishing broad form arbitration clauses to include torts, the court in Triple I Investments, Inc. v. K2 Unlimited, Inc., 287 Fed. Appx. 63 [Non.Cite.] held an arbitration clause “of claims arising out of the contract” included those which are caused by a breach as distinguished from those arising out of the existence of the arbitration clause itself. [Non. Pub.].

Examples of Broad Clauses:

"Any claim or controversy arising out of or relating to any aspect of the relationship between [the contracting parties]"; Cara's Notions, Inc., v. Hallmark Cards, Inc., 140 F.3d 566 (4th Cir. 1998); Mediterranean Ents. Inc. v. Ssangyong Corp., 708 F.2d 1458 (9th Cir.1983);

"All disputes arising out of or related to the execution, performance or termination of the contract are subject to arbitration"; Oldroyd v. Elmira Savings Bank, 134 F.3d 72 (2d Cir.1998);

"[Any claims which] touch upon matters covered by the parties' agreement;" World Crisa Corp. v. Armstrong, 129 F.3d 71 (2d Cir. 1997);

"Claims of whatever nature": Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840 (2d Cir. 1961);

"[A]rising hereunder" is a narrower clause than "arising out of"; Mediterranean Enterprises, Inc. v. Ssangyong Corp., 708 F.2d 1458 (9th Cir.1983);

"Any irreconcilable dispute;" National American Ins. Co. v. SCOR Reinsurance. Co., 362 F.3d 1288 (10th Cir. 2004);

"Arising during the contract" does not include a defamation claim occurring after termination of employment; Coudert v. Paine Webber Jackson & Curtis, 705 F.2d 78 (2d Cir. 1983);

If the "broad" clause is contradicted by a specific clause, the latter controls; Katz v. Feinberg, 290 F.3d 95 (2d Cir. 2002); Techno Steel, LLC v. Beers Construction Co., 271 F.3d 151 (4th Cir. 2001).

"A party who objects to arbitration on grounds the clause does not include him, does not waive the right to assert non coverage. A party cannot be compelled to arbitrate if the clause does not bind the party;" AT&T Techs., Inc. v. CWA, 475 U.S. 643 (1986).

Note: In some cases non-signatories are bound in the absence of signing a contract between third parties. See, Non-Signatories, this Section.

“. . .[Any and all disputes, disagreements, or claims . . . arising from or relating in any way to . . . this Agreement shall be submitted to and decided by binding arbitration pursuant to the provisions of this section,” clearly encompassed not only the merits of a substantive arbitration complaint but also the applicability of various defenses to such a complaint. . . Shell Oil Co. v. CO2 Committee, Inc., 589 F.3d 1105 (10th Cir. 2009)

Cross Reference: Ch. XVI-F-7; Initating Arbitration.  In Efund Capital Partners v. Pless, 150 Cal.App.4th 1311 (2007) the court repudidates the Ninth Circuit decision in Mediterranean, above. See, Valentine Capital Asset Management, Inc. v. Agahi, 2009 WL 1496819 (Cal.App.)

b. Narrow Clauses  [TOC]

If the arbitration clause is limited to specific arbitrable issues, i.e., "narrow", the court must determine whether the issues in dispute, on their face, are within the purview of the arbitration clause, or only a collateral matter connected to an agreement containing the arbitration clause. If the clause is "narrow", collateral matters are excluded; Louis Dreyfus Negoce v. Blystad Shipping & Trading, Inc., 252 F.3d. 218 (2d Cir. 2001); Lebanon Chemical Corp. v. United Farmers Plant Food, Inc., 179 F.3d 1095 (8th Cir. 1999); Quackenbush v. Allstate Ins. Co., 121 F.3d 1372 (9th Cir. 1997).

Comment: For an extensive discussion of the distinction between broad and narrow clauses, see: Ace Capital Re Overseas LTD v. Central United Life Ins. Co., 307 F.3d 24 (2d Cir. 2002).

Comment: The importance of drafting a clause describing the arbitral issues cannot be overstated. In Bratt Enterprises., Inc. v. Noble International Ltd, 338 F.3d 609 (6th Cir. 2003) the court distinguished between an arbitration clause agreeing to arbitrate disputes on the value of accounts receivable but not limitations on the value of the accounts.

c. Submission Agreement  [TOC]

In addition to the scope of the arbitration clause, the parties are bound by any "submission agreement" required by an arbitration service provider, or by a clause in the contract, by an independent neutral or by stipulation. This agreement cabins the scope of the arbitrator's authority as well as the contract language requiring arbitration;  Schoendove Corp. v. Lucent Techs., 442 F.3d 727 (9th Cir. 2006); Piggly Wiggly Operator's Warehouse, Inc. v. Piggly Wiggly Operator's Warehouse Truck Drivers, 611 F.2d 580 (1980).

Practice: The parties can agree to arbitrate without court intervention by giving "notice" and attaching a submission agreement. The parties can define arbitrable issues by preparing a submission agreement that may modify or expand the terms of the arbitration agreement. In determining the scope of arbitrator's authority, the court must consider the arbitration agreement and the submission agreement. Failure of a party to object imports arbitrator authority to resolve the issues raised in the demand for arbitration; Schoenduve Corp.

4. Conflicting Clauses [TOC]

Multiple agreements between parties may contain arguably conflicting clauses regarding arbitration, or, whether specific disputes are subject to arbitration. A subsequently drafted letter agreement to a merger agreement does not exempt plaintiff from arbitration; Drews Distribution, Inc. v. Silicon Gaming, Inc., 245 F.3d 347 (4th Cir. 2001). Specific provisions in multiple contracts may control over a general arbitration clause; Katz v. Feinberg, 290 F.3d 95 (2d Cir. 2002); TechnoSteel Ltd v. Beers, Ltd., 271 F.3d 152 (4th Cir. 2002); Bradford Scott-Data Corp. v. Physician Computer Network, 136 F.3d 1156 (7th Cir.1998).

5. Multiple Clauses  [TOC]

Business entities often draft contracts amending, deleting or supplementing the original contract. Whatever the characterization, subsequently drafted contracts may not necessarily reference an arbitration clause contained in the original contract. The court, in resolving "arbitrability," must determine arbitrable claims and non arbitrable claims; Poweragent, Inc. v. Electronic Data Systems Corp., 38 F.3 1187 (9th Cir 2004).

The Sixth Circuit canvassed this issue in Nestle Waters No. America, Inc. v. Bollman, 505 F.3d 498 (6th Cir.2007). The parties signed multiple contracts, some contracts contained arbitration clauses, some did not,  but arbitration of any dispute involving the dominant contract was contingent on a dispute arising out of another contract.  The court reviewed various factual cases to resolve the issue.

6. Ambiguous Clauses  [TOC]

As a general rule, ambiguity in an arbitration clause should be resolved in favor of arbitration; Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). In May v. Higbee Co., 372 F.3d 757 (5th Cir. 2004) the court held that continued employment by an employee constituted assent to be bound by the arbitration clause in an employment agreement, in effect a ratification of an otherwise ambiguous agreement. A broad arbitration clause, even if ambiguous, is enforceable if it provides terms that are "essential to the overall transaction;" Personal Sec.& Safety Systems, Inc. v. Motorola, Inc., 297 F.3d 388 (5th Cir. 2002).

State law governing ambiguity in contractual language provides the rationale for a court decision; Stark v. Sandberg Phoenix, & von Gontard, P.C., 381 F.3d 793 (8th Cir. 2004). A clause which says an award may include punitive damages "to the fullest extent of the law" must be consistent with state law; Stark.

Practice:  Whether a clause is “ambiguous” is fact intensive and spans the difference between arbitrable conduct occurring prior to execution of the contract/arbitration clause and subsequent to its expiration; Watson Wyatt  & Co. v. SBC Holdings, Inc., 513 F.3d 646 (6th Cir. 2008 );  Nestle Waters No. America, Inc. v. Bollman, 505 F.3d 498 (6th Cir. 2007)  See, Expired Contracts, this Chapter.

7. Merger Clauses  [TOC]

A merger clause (or integration clause) “merges” prior negotiations into a writing reciting that the document contains the entire agreement of the parties and normally invokes the parol evidence rule; Suburban Leisure Ctr. v. AMF Bowling Products, Inc., 468 F.3d 523 (8th Cir. 2006. In other words, the clause supersedes all prior negotiations, agreements and representations.

In a merger of two entities, the parties frequently document their relationship by executing multiple clauses. When one clause includes an arbitration clause but another does not, a merger clause survives any inconsistency among the documents; Bank Julius Baer & Co. Ltd. v. Waxfield Ltd, 424 F.3d 278 (2d Cir. 2005) [precluding parol evidence rule]. Cobb v. Contract Transport, Inc., 452 F.3d 543 (6th Cir. 2006) discusses the distinction between merger and sale of assets between successors in interest in the context of arbitration clauses in labor management disputes.

New York: Accord, Primex Int'l. Corp. v. Wal-Mart Stores, 89 N.Y.2d 594 (1997).

Comment: Merger (or consolidation;express or implied agreements of assumpion) clauses tend to be fact specific. In a non-cite case, the Tenth Cir. initially concluded that the agreement did not incorporate another document containing an arbitration clause and was not merged. To buttress this conclusion, the court referred to the forum selection clause in the contract referencing the forum for suit or action in an Oklahoma court. Forum selection clauses ordinarily allow the prevailing party to enforce an award; Summit Contractors, Inc. v. Legacy Corner, LLC. 147 Fed.Appx. 798 (10th Cir. 2005) [Non.Cite.).

                        8.  Illusory Clauses   [TOC]
Arbitration clauses in contracts are separately analyzed from the body of  the contract and federal courts have not all agreed on whether a clause permitting one party to unilaterally change the terms of the clause is illusory and unenforceable. See, Ch IV-G-2-a-1). In Morrison et. al. v. Amway Corp., 517 F.3d 248 5th Cir. 2008), the Fifth Circuit refused to compel arbitration on grounds the “distributors” (similar to franchisees) signed contracts authorizing the company to unilaterally change the terms, i.e. an illusory contract.  Cases cited for support to the court decision were employment cases.
The Eleventh Circuit defined “illusory” when “words of promise … by their terms make performance entirely optional with the ‘promisor’ whatever may happen, or whatever course of conduct in other respects he may pursue;” Lambert v. Austin Ind., 544 F.3d  1192 (11th Cir. 2008).
Cross Reference: Ch. XVII-C-8: Illlusory Contracts

G. Enforcing or Revoking Arbitration Clauses  [TOC]

Research Note: Challenges to the validity of an arbitration agreement include allegations that the underlying contract is "void", i.e., does not "exist". See, Chapter IV-F: Existence of Contract, supra.

1. Validity of Agreement to Arbitrate    [TOC]

After identifying the existence of an arbitration clause, the issues within its scope, and identity of parties subject to arbitration, the court must determine the validity of the "making of the agreement to arbitrate" unless the contract designates the arbitrator to determine "arbitrability;" First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995); 9 U.S.C. 2. The test is whether the arbitration clause is revocable on grounds of "law and equity;" 9 U.S.C. 2. The validity of a clause is a question of law; the enforceability of the clause is a question of equity (in the sense of procedural and substantive fairness).

Although the FAA uses the terms "revocation" of an arbitration clause, in reality the legal characterization is "rescission." But a cause of action to rescind the contract does not vitiate the arbitration clause; Unionmutual Stock Life Inc. Co. of Am. v. Beneficial Life Ins. Co., 774 F.2d 524 (9th Cir.1985).

Federal courts apply state general contract law in analyzing the validity of an arbitration clause; Howsam v. Dean Witter Reynolds, 537 U.S. 79 (2002); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995); Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003). Because state general contract law varies among different states, results may differ. For example, general contract law requires "consideration" to enforce a contract as a necessary element. An arbitration clause in an employment agreement exchanges a promise to arbitrate for a promise of employment. In Tinder v. Pinkerton Security, 305 F.3d 728 (7th Cir. 2002) the court held, under Wisconsin state law, this exchange of bilateral promises constituted adequate consideration

Cross Reference: In California, arbitration clauses in employment contracts contain a promise to work in exchange for a promise to pay. This is adequate consideration; Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000).

Further, an employee who continues to work under the aegis of the arbitration clause evidences a mutual promise to arbitrate; Tinder @ 734; O'Neil v Hilton Head Hospital, 115 F.3d 272 (4th Cir. 1997); May v. Higbee, 372 F.3d 757 (5th Cir. 2004).

2. Objections to Enforcement of Agreement  [TOC]

The element of "arbitrability" also includes a judicial determination whether to enforce the arbitration agreement; 9 U.S.C. 2. In this category, the federal court also applies substantive state contract law in determining whether "equitable" grounds deny enforcement of the arbitration clause; Soltani v. Western & Southern Life Ins. Co., 258 F.3d 1038 (9th Cir. 2001); Ticknor v. Choice Hotels, Int., Inc., 265 F.3d 931 (9th Cir. 2001). For example, an arbitration clause incorporating unconscionable terms, or an illusory promise, are all legally "valid," i.e., no fraud, duress or lack of authority to sign, but "equitably" unenforceable.

Examples::

Fraudulently representing the terms of the arbitration agreement; duress; Merrill Lynch, et al. v. Haydu, 637 F.2d 391 (11th Cir. 1981);

Contractual defects such as mental incapacity; Primerica Life Ins. Co. v. Brown, 304 F.3d 469 (5th Cir. 2002); Spahr v. Secco, 330 F.3d 1266 (10th Cir. 2003);

Mutuality of mistake; Unionmutual Stock Life Ins. Co. of Am. v. Beneficial Life Ins. Co., 774 F.2d 524 (1st Cir.1985); Adkins v. Labor Ready, Inc., 303 F.3d 496 (4th Cir. 2002);

Illusory: Lewis v. Circuit City Stores, Inc., 500 F.3d 1140 (10th Cir. 2007) [unfettered right to alter agreement]; Hardin v. First Cash Financial Services, 465 F.3d 470 (10th Cir. 2006) Okla.);
Lambert v. Austin Ind., 544 F.3d 1192 (11th Cir. 2008).

Forgery; Fazio v. Lehman Bros., 340 F.3d 386 (6th Cir. 2003).

These issues may void formation of the agreement, and invalidate the clause; Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).

As a general rule, when Claimants challenge the arbitration agreement per se, enforcement of the arbitration clause is a judicial decision. A challenge on grounds stated above may include considering the language of the contract itself. A party mentally incapacitated cannot form a contract nor execute a valid arbitration agreement. As these cases illustrate, whether the court or arbitrator decides this issue differs among the Circuits; Nagrampa v. Mailcoups, Inc., 469 F.3d 1257 (9th Cir. 2006).

More commonly, procedural objections such as allegation of an unfair arbitration forum, violation of public policy, and other "external restraints" to arbitration will cause a court to refuse to enforce an arbitration clause on grounds of fundamental unfairness.

See:  Ch. 1-B: Federal Statutory Claims.

As long as the arbitrable forum can vindicate statutory rights, the Supreme Court has repeatedly enforced arbitration clauses against challenges that parties cannot arbitrate disputes alleging violation of federal statutes; Gilmer v. Interstate/Johnson Lane Corp. 500 U.S. 20 (1997); RICO: Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987);  The party resisting arbitration bears the burden of showing interference of arbitration with statutory rights; Booker v. Robert Half Intern., Inc., 413 F.3d 77 (D.C. Cir. 2005).

a. Unconscionable Clauses   [TOC]

Introduction

As a general rule, commercial contracts negotiated between parties are either the result of bargaining or ompromise. Non-negotiated contracts, usually standard forms issued to consumers, employees or franchisees, are characterized as "adhesive", or in the vernacular of the trade, "take it or leave it." More recently, adhesive contracts include an arbitration clause in real estate transactions, bank accounts, credit card companies, construction projects or other mass distribution agencies. Courts acknowledge the commercial necessity for "boilerplate" contracts, but the prospect for deception exists and these terms are characterized as potentially "unconscionable".

Federal courts are bound by state law on "unconscionable" arbitration clauses in contracts but not all states have enacted this concept. Absent state law, federal courts must rule according to general concepts of equity; Volt Information Sciences v. Leland Stanford Jr. University Bd. of Trustees, 489 U.S. 468 (1089); Hooters of Am. v. Phillips, 173 F.3d 933 (4th Cir. 1999).

Most litigation seeking to revoke arbitration clauses has occurred in the employment context, and both have asserted numerous objections to arbitrability of adhesive employment agreements. Consumer contracts (Jenkins v. First American Cash Advance of Ga., LLC, 400 F.3d 868 [11th Cir. 2005]) and franchise contracts have also been challenged as adhesive and unconscionable. The Ninth Circuit had repeatedly stricken arbitration clauses in employment agreements under the "revocation" language of the FAA, refusing to enforce arbitration on state court grounds of "unconscionability;" Shroyer v. New Cingular Wireless, Inc., 498 F.3d 976 (9th Cir. 2007) [ consumer];  Davis v. O’Melveny & Myers, 485 F.3d 1066 (9th Cir. 2007) [employment];  Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003) [employment]; Circuit City Stores Inc. v. Mantor, 335 F.3d 1101 (9th Cir. 2003) [employment agreement]; Ticknor v. Choice Hotels, Int., Inc., 265 F.3d 931 (9th Cir. 2001) [franchise].

Manufacturers and distributors of consumer goods have argued that consumers have the opportunity to purchase alternatives and can elect not to purchase a product by invoking “market alternatives,” thereby eliminating the adhesive contract and its potential “unconscionability;”
Ozomoor v. Mobile, USA, Inc., 2009 WL 4408187 (6th Cir. 2009) Non Citd]. This is not the rule in California state court or the Ninth Circuit.

 In Circuit City Stores, Inc. v. Adams, 535 U.S. 1112 (2002) on remand to the Ninth Circuit after reversal by the Supreme Court, the Justices held that the FAA applies to arbitration clauses in employment contracts. The Ninth Circuit had initially refused to enforce arbitration clauses in employment contracts but ultimately concurred under compulsion of Circuit City; E.E.O.C. v. Luce, Forward, Hamilton & Scripps, 345 F.3d 742 (9th Cir. 2003).

Comment: Given the anti–arbitration bias of the Ninth Circuit reflected in the cases cited above it is not surprising the court found a way to subvert Circuit City by finding an arbitration clause “unconscionable under California law. It refused to enforce the “notice” to employees provision (file claim within one year impermissibly accelerated the statute of limitations); the confidentiality requirement; and the prohibition on administrative action; Davis v. O’Melveny & Myers, 485 F.3d 1066 (9th Cir. 2007).

Although California law on unconscionable contracts is abundant, and the Ninth Circuit has embraced it (Ferguson v. Countrywide Credit, Inc., 298 F.3d 778 [9th Cir. 2002]), that court also held the term applied to an employee who had been terminated three years prior to initiating a lawsuit; Al-Safin v. Circuit City Stores, Inc., 394 F.3d 1254 (9th Cir. 2005). Other states have neither enacted the doctrine of "unconscionable" contracts nor judicially acknowledged it; Cooper v. MRM Inv. Co., 367 F.3d 493 (6th Cir. 2004).

Federal courts must apply state substantive law in reviewing the formation of an arbitration clause. Consequently, the analysis of "unconscionability" is state specific, but in the absence of state law, a federal court sitting in diversity must nevertheless analyze the issue-or perhaps certify the question to the state court.

The Ninth Circuit has reviewed state law of unconscionability law in Washington, Arizona and California; Batory v. Sears, Roebuck & Co., 124 Fed. Appx. (2005) [Non.Cite.]

Cross Reference: See, Ch. XVII-C-4-a: Procedural & Substantive Unconscionability

Examples of contracts deemed unconscionable under state law outlined in Part II include: allocating payment of arbitration fees and attorney fees; Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 93 (2000); absence of mutuality of remedy; Parilla v. IAP Worldwide Services VI, Inc., 368 F.3d 269 (3d Cir. 2004); cf: Faber v. Menard, Inc., 367 F.3d 1048 (8th Cir. 2004) [court approved sharing of fees].

Remedial limitations, as noted in the Section on "Remedies", do not warrant denial of enforcing an arbitration clause under the FAA; PacifiCare Health Systems, Inc. v. Book, 538 U.S. 401 (2003); Hawkins v. Aid Assn. for Lutherans, 338 F.3d 801 (7th Cir. 2003) [pre-PacifiCare].

Cross Reference: California law on remedial limitations in an arbitration clause is to the contrary. Remedial limitations are a ground for refusing to enforce an arbitration clause at a hearing to compel arbitration; Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 93 (2000).

Although "equitable" grounds should be identified in state contract law, in Hooters of America, Inc. v. Phillips, 173 F.3d 933 (4th Cir. 2001) the court found the terms of the arbitration clause unenforceable and "inequitable" without reference to state law. The Third Circuit concurred in Alejandro v. LS Holding, Inc., 130 Fed. Appx.544 (Non.Cite.). Focusing on state law of mutuality of obligation and consideration in interpreting a CBA agreement, the court characterized the agreement as unconscionable. Hooters, interpreted in legal language, also found the contract "unconscionable;" Ticknor v. Choice Hotels, Inc., 265 F.3d 931 (9th Cir. 2001). Yet the Third Circuit found no unconscionable arbitration clause limiting remedies of a mortgagor; Harris v. Green Tree Fin. Corp., 183 F.3d 173 (3d Cir. 1999); reaffirmed in Salley v. Option One Mortgage Corp., 2007 WL 2274430 (3d. Cir. Pa.) [Non.Pub.] characterizing the disproportiate remedies between lender and consumer as a “business necessity” and disputes best resolved by the courts. The First Circuit found adequate consideration in an employment agreement that triggered acceptance by an employee who continued working; Seawright v. American Gen. Financial Services, Inc., 505 F.3d 498 (6th Cir. 2007).

Note: The doctrine of "unconscionable" contracts is not acknowledged in every state. In Taylor v. Butler, 142 S.W. 2d 277 (Tenn. 2004) the non-prevailing party urged this defense on the Supreme Court; certiorari was denied.

See: Alejandro v. LS Holding, Inc., 130 Fed.Appx. 544 (3d Cir. 2005) [Non. Cite.] for an excellent summary of the law of unconscionability, and holding that an employee's waiver of litigation in exchange for employment constituted adequate consideration.

Class actions and unconscionable contracts are discussed in Procedural Law & Arbitrability, this Chapter.

Cross Reference: Ch. XVII-C-4: Unconscionable Clauses

1.) Unilateral Change in Terms  [TOC]

An arbitration clause in a contract permitting one side to change the terms unilaterally is arguably unconscionable, and resolution depends upon state law;  Morrison et. al. v. Amway Corp; 517 F.3d 248 (5th Cir. 2008) [collecting cases]. But in Iberia Credit Bureau, Inc. v. Cingular Wireless LLC, 379 F.3d 159 (5th Cir. 2004) the court approved this type of clause against challenges of unconscionability; Caley v. Gulfsteam Aerospace Corp., 428 F.3d 1359 (11th Cir. 2005); Blair v. Scott Specialty Gases, 283 F.3d 595 (3d Cir. 2002) [Pa.; Hardin v. First Cash Financial Services, Inc., 465 F.3d 470(10th Cir. 13267; Okla.); reasonable restrictions required].

Ingle v. Circuit City Stores, Inc. 408 F.3d 592 (9th Cir. 2003) is directly contrary and refuses to enforce a provision permitting an employer to unilaterally change terms of employment. See, also, Hill v. Peoplesoft USA, Inc., 412 F.3d 546 (4th Cir. 2005).

An employer who permits an employee to "opt out " of an arbitration agreement can avoid an unconscionability argument; Circuit City Stores, Inc. v. Ahmed, 283 F.3d 1198 (9th Cir. 2002).
Reference: Also listed under Illusory Contracts; Ch. IV-F-8.

Cross Reference
: 24 Hour Fitness v. Sup.Ct., 66 Cal.App.4th 1199 (1998) holds that one party can retain the power to modify prior contracts (to add an arbitration clause or change terms) as long as it initially retains the option to exercises it in good faith and fair dealing. The court also held that unilateral modification of an employment contract is not illusory.

2.) Confidentiality Agreement  [TOC]

The Ninth Circuit held that a "confidentiality" agreement in an arbitration clause is unenforceable as an unconscionable term; Pokorny v. Quixtar, Inc., 601 F.d 987 (9th  Cir. 2010); Davis v. O’Melveny & Myers, 485 F.3d 1066 (9th Cir. 2007);  Ting v. AT & T, 319 F.3d 1126 (9th Cir. 2003). In Parilla v. IAP Worldwide Service VI, Inc., 368 F.3d 269 (3d Cir. 2004), the court confirmed the role of "confidentiality" in arbitration and rejected challenges by consumers and employees who may want to alert third parties to arbitrator's decisions; reaffirmed in Lloyd v. Hovensa LLC, 369 F.3d 263 (3d Cir. 2004); accord, Iberia Credit Bureau v. Cingular Wireless LLC, 379 F.3d 159 (5th Cir. 2004) [confidentiality agreement not unconscionable]; The Fifth Circuit confirmed Iberia in ITT Educational Services  v. Arce, ) 533 F.3d 342 (5th Cir. 2008); Caley v.Gulfstream Aerospace Corp., 428 F.3d 1359 (11th Cir. 2005).

Cross Reference: Confidentiality  Agreement: Ch. XVII-C-4-g

3.) Unfair Arbitration Panel  [TOC]

A party who maintains control over selection of arbitrators does not assure a neutral panel for arbitration and precludes the other party from vindicating statutory rights otherwise available in a judicial forum; McMullen v. Meijer, Inc. v. 355 F.3d 485 (6th Cir. 2004) [employment case]; Hooters of America, v. Phillips, 173 F.3d 933 (4th Cir. 1990) [employment]. Whether the court can impose this rule in a case alleging common law rights is unclear.

4.) Fraud  [TOC]

Fraud is a variety of unconscionability in the sense that it is a defense to the enforcement of a contract in general or an arbitration clause in particular. As noted earlier, the court resolves allegations of fraud in an arbitration clause; and the arbitrator resolves issues on the merits of the dispute; Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006).  A court attempting to interpret an arbitration clause should not, as a general rule, refer to the allegations of the complaint in resolving that issue but in some cases the need arises; Nagrampa v. Mailcoups, Inc., 469 F.3d 1257 (9th Cir. 2006).

Nagrampa collects federal cases differing in resolution of this issue but in the Ninth Circuit this rule prevails.

The Seventh Circuit has ruled that inabiity to speak, write, or understand the English langauge does not vitiate the contract or warrant refusal to enforce the arbitration clause in the absence of fraud; Morales v. Sun Construction, Inc., 541 F.3d 218 (3d. Cir. 2008).

Cross Reference: In Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 93 ( 2000) the court compared illegality of contract with fraud and interpreted them similarly.  Severance is an option in illegal contracts if the unenforceable term does not permeate the contract.

 

b. Rescission  [TOC]

A cause of action for rescission does not vitiate the arbitration clause. Rescission is a question for the arbitrator to resolve; Large v. Conesco Fin. Services Corp., 292 F.3d 49 (1st Cir. 2002); Union Mutual Life Ins. Co. of America v. Beneficial Life. Ins. Co., 774 F.2d 524 (9th Cir. 1985).

Cross Reference: St. Agnes Med.Ctr. v. PacifiCare of Cal., 31 Cal.4th 1187 (2003): a cause of action for rescission does not invalidate the arbitration clause.

3. External Constraints to Arbitration  [TOC]

In addition to revocation on "grounds of law and equity," the Supreme Court has also identified a doctrine known as "legal constraints external to the parties agreement," and, if applicable, potentially forecloses or limits arbitration of claims; Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985). No statutory authority exists for this doctrine and it is a judicially invented rule to deny validity and enforcement of an arbitration agreement; Wilko v. Swan, 346 U.S. 427 (1953). Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) apparently confirms this doctrine.

"Legal constraints" frequently apply in adhesive contracts of employment and include these categories: Arbitration clauses unilaterally imposed limiting or denying remedies only to one party: class actions; injunctive relief; costs of arbitration; interest; attorney fees and punitive damages. Under Gilmer, these clauses arguably prevent a prevailing party from "vindicating statutory rights" (Title VII) otherwise available in litigation, and some courts strike the arbitration clause on this ground; Paladino v. Avnet Computer Technologies, Inc., 134 F.3d 1054 (11th Cir. 1998) [remedial purposes of Title VII could not be enforced]. Other courts characterize this issue as one not of "arbitrability" but a remedial provision the arbitrator can strike; Bailey v. Ameriquest Mort. Corp., 346 F.3d 821 (8th Cir. 2003)); Larry's United Super, Inc. v. Werries, 253 F.3d 1083 (8th Cir. 2001) [cites the contract severance clause]. Other courts require any award to include statutory remedies; Spinetti v. Service Corp. Int., 324 F.3d 212 (3d Cir. 2003); Gannon v. Circuit City Stores, Inc., 262 F.3d 677 (8th Cir. 2001).

Comment: The doctrine of "legal restraints" judicially imposed on arbitration clauses attempts to forbid unfair advantage of one party over another. The "legal restraints" are essentially equitable and can be re-characterized under ordinary contract law as "unconscionable", thereby inhibiting vindication of statutory rights. Or, "public policy," below. Invoking "legal restraints" enables federal courts to avoid state substantive law that does not recognize "unconscionability."

4. Public Policy   [TOC]

The court may refuse to order arbitration, or vacate an award, if the arbitration clause violates public policy. Public policy must be well defined and dominant, ascertained by reference to laws and legal precedent and not from general considerations of supposed public interest; Eastern Assoc. Coal Corp. v. UMW, 531 U.S. 57 (2000); United Paperworkers International Union v. Misco, 484 U.S. 29 (1987); W.R. Grace & Co. v. Local Union 759, Int., 461 U.S. 759 (1983). The Supreme Court has advised lower courts that application of this amorphous doctrinal rule is narrowly construed; Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.1 (1991). For example, an arbitration clause mandating "confidentiality" of the parties is not against public policy; Parilla v. IAP Worldwide Services, VI, Inc., 368 F.3d 269 (3d Cir. 2004); Iberia Credit Bureau v. Cingular Wireless LLC, 379 F.3d 159 (5th Cir. 2004); contra, Ting v. AT& T, 319 F.3d 1126 (9th Cir. 2003); Pokorny v. Quixtar, Inc., 601 F.3d 987 (9th Cir. 2010).

See, Paladino v. Avnet Computer Technologies, Inc., 134 F.3d 1054 (11th Cir. 1998)[arbitration clause limited Title VII remedies]; compare, Snowden v. Checkpoint Check Cashing, 290 F.3d 631 (4th Cir. 2002) [consumer laws].; Twin Galleries, LLC v. Media Arts, 476 F.3d 598 (8th Cir. 2007) [choice of law].

The Supreme Court public policy rationale has been applied principally in employment disputes between labor and management in the interpretation of collective bargaining agreements. Circuit courts have reviewed allegations of public policy in these categories:

Safety regulations: Homestead Min. Co. v. United Steelworkers of America, 158 F.3d 678 (8th Cir. 1998); Iowa Electric Light & Power Co. v. Local Union 204, Int., 834 F.2d 1424 (8th Cir. 1997);

Drug testing: Int. Brotherhood of Electrical Workers v. Niagra Mohawk Power Corp., 143 F.3d 704 (2d Cir. 1998); Exxon Corp. v. Esso Worker'sUnion, 118 F.3d 841 (1st Cir. 1997);

CBA: Arbitration award not prohibited by CBA does not constitute violation of a public policy; Eastern Assn. Coal Corp. v. UMW, 531 U.S. 57 (2000).

Note: Although these are CBA decisions, the rationale is arguably applicable in arbitration as precedent.

Cross Reference: Part II, Ch. XVII-C-4-d:  California Arbitration, Public Policy

Despite the cautionary language of the Supreme Court restricting the use of "public policy", Circuit Courts have not always complied. For example, an arbitration clause prohibiting employees from asserting legal rights or remedies in the event of a non-union workplace dispute violated public policy: Hooters of America, Inc. v. Phillips, 173 F.3d 933 (11th Cir.1999). But in Investment Partners L.P v. Glamour Shots Licensing, Inc., 298 F.3d 314 (5th Cir. 2002) the court enforced an arbitration clause prohibiting an award of punitive damages.

See also, Larry's United Super, Inc. v. Werries, 253 F.3d 1083 (8th Cir. 2001). As above, the Investment Partners court agreed that the Circuits are split on whether to enforce an arbitration clause limiting remedies prior to arbitration; Paladino; Snowden. The Supreme Court in PacifiCare Health Systems, Inc. v. Book, 538 U.S. 401 (2003) may have resolved this issue, infra.

The more difficult issue is whether a court may refuse to order arbitration at the time the motion to compel is filed or wait until the arbitrator issues an award arguably based on violation of public policy. The Supreme Court decision in Pacificare apparently adopts the view that remedial limitations in an arbitration clause are not the subject of "arbitrability", i.e., revocation on grounds of "law and equity," in refusing to enforce an arbitration clause and are remediable only on a petition to vacate the award.

In Paladino, the court refused to order arbitration. In Larry's United Super, Inc., the court regarded the issue as one of "arbitrability" but delayed review of the issue until the arbitrator rendered an award. In a franchise dispute, the Ninth Circuit held that despite a severability clause, the entire arbitration clause compelling a franchisee to surrender statutory rights would not be severed; Graham Oil Co. v. ARCO Products Co., 43 F.3d 1244 (9th Cir.1994); contra, Arkom Digital Corp. v. Xerox Corp., 289 F.3d 536 (8th Cir. 2002) [franchise agreement].

See, Remedial Limitations, next.

Cross Reference: Part II, Ch XVII-C-4; Public Policy

5. Remedial Limitations    [TOC]

a. Arbitration Fees & Costs  [TOC]

A party who declares financial inability to pay the cost of arbitration may, in some cases, compel the opposing party (usually an employer) to bear costs. In Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000) the Supreme Court agreed that inordinate arbitration fees and costs imposed on a party could potentially disable a claimant from vindicating federal statutory rights. The Court imposed a burden of proof on the claimant to establish financial hardship, and Circuit Courts have struggled to find a procedural mechanism to achieve that goal. In Musnick v. King Motor Co. of Fort Lauderdale, 325 F.3d 1255 (11th Cir. 2003) the court required claimant to establish his inability to pay fees in a "loser pays" clause prior to commencing arbitration. In McCaskill v. SCI Mgmt. Co., 285 F.3d 623 (7th Cir. 2002) the court refused to enforce an attorney fees clause ("loser pays") in the arbitration agreement and denied the petition to compel arbitration (collecting cases).

Musnick reviews numerous federal cases and concludes that, in all cases, the court either enforced the arbitration agreement or remanded to the trial court for further fact finding.

In Spinetti v. Service Corp. International, 324 F.3d 212 (3d Cir. 2003) the court severed the arbitration clause-based on state law- requiring the parties to share costs and fees and noted that Title VII required fees awarded to a successful Claimant. This provision overrode the limitation in the arbitration clause; Accord, Gannon v. Circuit City Stores, Inc., 262 F.3d 1244 (8th Cir. 2001).

Unlike some California decisions refusing to “reform” the contract, in E.E.O.C. v. Woodmen of the World Life Insurance Corp., 479 F.3d 561 (8th Cir. 2007) the court severed the cost sharing when the employer agreed to pay arbitratio fees and costs. The court noted the employee must pay attorney fees whether in arbitration or litigation.

In Morrison v. Circuit City Stores, Inc. 317 F.3d 646 (6th Cir. 2003) the court held that the trial court must hold a hearing to determine whether "similarly situated" Claimants would be deterred from arbitration by paying costs; Morrison confirmed in Malera v. Varsity Ford Mgmt. Services, 2009 WL 1375887 (6th Cir. 2009). See also, Bradford v. Rockwell Semi Conductors System, Inc., 238 F.3d 549 (4th Cir. 2001) [case by case analysis].

The Circuit Courts have split on whether costs and fees should be determined before, or after, the arbitration. The burden of proof is on the claimant to establish inability to pay; Parilla v. IAP Worldwide Services, VI, Inc., 368 F.3d 269 (3d Cir. 2004); Faber v. Menard, Inc., supra; Johnson v. West Suburban Bank, 225 F.3d 366 (3d Cir. 2000); Scovill v. WSYX/ABC, 425 F.3d 1012 (6th Cir. 2005). Inability to pay should be determined at the time the parties enter the contract; Overstreet v. Contigroup Cos., Inc., 462 F.3d 409 (5th 2006).

The crucial issue on payment of costs is the appropriate stage of proceedings to object to terms allegedly unfair, i.e., at the hearing on the petition to compel arbitration, or appeal after judgment. If the objection is to formation of an arbitration agreement as unconscionable or unfair, the court must rule at the hearing on the petition to compel arbitration under state or federal law. If the objection is to limitations on remedies contained in the arbitration clause, the federal court must wait until the arbitrator rules; PacifiCare Health Systems, Inc. v. Book, 538 U.S. 401 (2003).

Applying state law on unconscionable contracts, the court in Overstreet v. Contigroup Companies, Inc., 462 F.3d 409 (5th Cir. 2006) the court held that a claimant's current financial status is irrelevant; the proper computation for an allegation a claimant cannot afford arbitration is the date the parties signed thee contract.

Practice: Whether a claimant should bear costs of an arbitration is not a question of the validity of the arbitration agreement but whether to enforce it. Costs are not remedial and usually a separate issue in litigation or arbitration. The better practice is to resolve costs tentatively at the petition to compel arbitration and allow the arbitrator to subsequently allocate in the award subject to consideration by the court upon confirmation.

Cross Reference: In California courts, the ruling on costs as an element of unconscionability is determined at the petition to compel arbitration; Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 93 (2000). Part II, XVII, C, 4: Unconscionability and Costs of Arbitration, infra. In California, CCP 1284.2 allocates expenses of fees and costs of the neutral arbitrator but not witness or attorney fees. In employment cases, the rule is different; Armendariz. The employer must pay all non- litigation expenses.

See, Anti Injunction Act, Ch. II-E-2 .

b. Arbitration Fee Disputes  [TOC]

Aside from attorney fees and costs of an arbitration and a potential recovery from the losing party, in some cases one party objects to, or refuses, to pay arbitration fees. In Lefkovitz v. Wagner, 395 F.3d 773 (7th Cir. 2005) the losing party would not pay his share of fees and alleged the arbitrator was biased. Arbitration service providers generally provide for this objection in their Rules, but in any event, a party cannot await the outcome of the arbitration and then object on grounds of bias; Lefkovitz.

H. Procedural Law & Arbitrability  [TOC]

The FAA, not the Federal Rules of Civil procedure, apply in arbitration; Schoenduve Corp. v. Lucent Techs., Inc., 442 F.3d 727 (9th Cir. 2006); Pike v. Freeman, 266 F.3d 78 (2d Cir. 2001). In ruling on a motion to stay proceedings in District Court pursuant to 9 U.S.C. 3, and in determining whether to order the parties to arbitration pursuant to 9 U.S.C. 4, the trial court must initially determine "arbitrability. i.e., issues related to the "making and performance of the agreement to arbitrate;" Green Tree Fin. Corp. v. Bazzle, 539 U.S. 1029 (2003); Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). Howsam draws a distinction between procedural arbitrability and substantive arbitrability. The former is for the arbitrator, the latter for the court. Procedural arbitrability consists of: time limits to commence arbitration, notice, laches, and other conditions related to an obligation to arbitrate. The Court characterizes these as issues for the arbitrator to resolve, with some exceptions, under State contract law.

Procedural issues and remedial authority are arbitrator decisions; PacifiCare Health Systems, Inc. v. Book, 538 U.S. 401 (2003); Howsam; Bailey v. Ameriquest Mort. Co., 346 F.3d 871 (8th Cir. 2002). Although the arbitrator may decide procedural rules and remedial provisions pursuant to state court rules for a state ordered arbitration, if the parties have contracted for FAA rules, Howsam applies in federal court ordered arbitration; Fidelity Federal Bank, FSB v. Durga Ma Corp., 386 F.3d 1306 (9th Cir. 2004).

In a hearing on a petition to compel arbitration, the court resolves substantive issues (validity of the arbitration clause, issues, parties). An action to enjoin arbitration is, arguably, resolved under the standard applicable to general removal sections for injunctions under 28 U.S.C. 1391 although the two events are dissimilar. In any event, enjoining an arbitration is an appealable order; 9 U.S.C. 16 (a)(2); DSMC, Inc. v. Convera Corp., 349 F.3d 679 (DC Cir. 2003)

Cross Reference: Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2005) held that the parties' designation of California law in governing the arbitration included procedural law and the FAA did not preempt. Rodriguez v. American Technologies, Inc., 136 Cal. App.4th (2006) holds that the parties can expressly provide for FAA procedural law.

1. Forum Selection Clause: Situs  [TOC]

Initially, distinguish between forum selection of arbitration (arbitrable forum) rather than judicial, and a forum selection clause for the situs of the arbitration. Arbitration agreements are merely a category of forum selection clauses; E.E.O.C. v. Waffle House, Inc., 534 U.S. 755 (2002). This Section focuses on the location of the arbitration proceedings.

In federal courts, forum selection clauses are highly favored in commercial transactions at the international and domestic level; Carnival Cruise Lines, Inc. v. Shute,499 U.S. 585 (1991); E. & J. Gallo Winery v. Andina Licores, S.A., 446 F.3d 984 (9th Cir. 2006).

Unless the forum selection clause specifically precludes arbitration, the court will enforce it based upon the strong presumption of arbitration; Bank Julius Baer & Co. v. Waxfield Ltd, 424 F.3d 278 (2d Cir. 2005).

Although forum selection clauses are presumed valid, restrictions may apply in adhesive contracts disproportionately favoring one side. In Jensen v. Klayman, 115 Fed. Appx. 634 (2000) [Non.Cite.] the court applied this rule to choice of law clauses.

The trial court can only rule on the validity and enforceability of the arbitration clause, as distinct from the merits of the claim, but a state forum selection clause is probably severable from the underlying contract if the court holds local franchise law is preempted; KKK Enterprises, Inc. v. Gloria Jean's Gourmet Jean's Gourmet Coffees Franchising Corp., 184 F.3d 42 (1st Cir. 1999).

a. Selection of Arbitration Forum  [TOC]

". . . [a] clause which adopts the rules of an organization . . . implicitly chooses that organization as the forum;" Reddam v. KPMG, 457 F.3d 1054 (9th Cir. 2006).

In disputes between customers and brokers in the securities industry, two prominent self-regulatory organizations (NASD & NYSE) provide arbitration panels and their own rules. The arbitration agreement identifies NASD,. i.e. a selection fo the forum for resolutin of disputes.

If either organization refuses to provide facilities and panels as a forum for dispute resolution, and the arbitration agreement is integral to the selection of this forum, the court must try the case; In re Salomon, Inc. Shareholders' Derivative Lit., 68 F.3d 554 (2d Cir. 1995). The Federal court noted that the issue is not the appointment of a different arbitrator (9 U.S.C. 5), but the forum for resolution of the dispute. Accord: Smith Barney, Inc. v. Critical Health Systems of N.C., Inc. of Raleigh, N.C., 212 F.3d 858 (4th Cir. 2000) [requiring compliance with clause].

The Ninth Circuit emphasized that the forum selection clause must be integral to the agreement to arbitrate, rather than an ancillary concern; Reddam v. KPMG LLP; Brown v. ITT Consumer Fin. Corp., 211 F.3d 1222 (11th Cir. 2000).

Note: Reddam comments on whether state or federal law applies, citing Smith Barney, Inc. and in re Salomon, Inc. Shareholders Derivative Litigation, 69 F.3d 554 (2d Cir. 1994). In Howsam v. Dean Witter Reynolds, 537 U.S. 79 (2002) the Supreme Court held that forum selection of the situs of the arbitration is a question for the arbitrator if the contract is freely negotiated. The court should not rewrite the contract; Richard C. Young & Co. Ltd v. Leventhal, 389 F.3d 1 (1st Cir. 2004); In re Mercurio, 402 F.2d 62 (1st Cir. 2005) held that "inconvenience" is not grounds to refuse enforcement of the agreement. But the court may intervene if the arbitrators disregard that provision; Sterling Fin. Inv. Grp. v. Hammer, 393 F.3d 1223 (11th Cir. 2004).

Comment: Howsam is an NASD case. Generally, a generic forum selection clause, i.e., the law of a particular state, is a question of state law but the NASD involves a federally regulated industry and federal law governs. See, also: Doctor's Assoc., Inc. v. Hamilton, 150 F.3d 157 (2d Cir. 1998). Vulcan Chemical Tech. v. Barker, 297 F.3d 332 (4th Cir. 2002) collects numerous cases on forum selection clauses in the context of litigation.

Cross Reference: California law permits severance of a forum selection clause identifying a distant state; Bolter v. Sup.Ct., 87 Cal.App.4th 900 (2001). Bolter is inconsistent with Ninth Circuit case law. In Bradley v. Harris Research, Inc., 275 F.3d 884 (9th Cir. 2001) the Ninth Circuit denied enforcement of a forum selection clause requiring a California resident to arbitrate any dispute in Georgia.

Note the importance of drafting a forum selection clause in a contract. A forum selection clause providing a judicial forum over "suits and proceedings" cannot nullify an arbitration clause unless the clause specifically precludes arbitration; Bank Julius Baer & Co. v. Waxfield, Ltd, 424 F.3d 278 (2d Cir. 2005). The term used only applies to disputes not subject to arbitration; Personal Security & Safety Systems Inc. v. Mororola, Inc., 297 F.3d 388 5th Cir. 2002). Enforcement may depend on the applicability of state or federal law; Green Tree Fin. Services Corp. v. Bazzle, 539 U.S. 1029 (2003).

b. Conflicting Sites  [TOC]

If the arbitration agreement and other incorporated documents conflict as to the location of the arbitration, the court can resolve the issue and its resolution is not subject to interlocutory appeal; Bushley v. Credit Suisse, First Boston, 360 F.3d 1149 (9th Cir. 2004).

c. Wrong Site  [TOC]

Presumably the Bushley rule applies in this context.

Cross Reference: Part II, Ch. XVII-B-2; Forum Selection in State Court.

2. Choice of Law Clause   [TOC]

Arbitration clauses often include a choice of law clause directing the arbitrator to apply a particular state's general law. In Mastrobuono v. SLH, Inc., 514 U.S. 52 (1995) the Supreme Court held that a choice of law clause applied to state substantive law but not to state decisional law allocating power between courts and arbitrators, essentially limiting authority of the latter.

The Ninth Circuit adhered to this precedent in Chiron Corp. v. Ortho Dignostic Systems, Inc., 207 F.3d 1126 (9th Cir. 2000) and also interpreted the clause in question as governed by the FAA, not local state law, absent a clear intent to incorporate state rules for the conduct of arbitration; First Federal Bk. FSB v. Durga Ma Corp., 386 F.3d 1306 (9th Cir. 1306 (2004); Sovak v. Chugai, 280 F.3d 1266 (9th Cir. 2002); Puerto Rico Tel. Co, Inc. v. U.S. Phone Mfg. Corp., 427 F.3d 21 (1st Cir. 2005).

Chiron distinguished Volt Info. Sci., Inc. v. Bd of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468 (9th Cir. 1989) and upheld use of California procedural rules in state court. The court permitted a stay of arbitration in cases involving multiple parties despite a FAA choice of law clause in the arbitration agreement. According to the Ninth Circuit in Chiron, the Volt court deferred to a state court interpretation of its local law, whereas in Chiron the court was interpreting a federal court construction of a contract.

A federal court sitting in diversity cases applies the choice of law rules of the state in which the action was brought; Progressive Cas. Ins. Co. v. C.A. RNV, 991 F.2d 42 (2d Cir.1993).  This category of law emerges in a diversity case without reference to procedural rules but to the substantive laws of the respective states.  The federal court must match the conflicting choice of laws between two states; Twin Galleries, LLC v. Media Arts Grp., Inc., 476 F.3d 598 (8th Cir. 2007) [choice of law].  If choice of law is a procedural rule, the court must defer to the arbitrator in a hearing to compel arbitration (Green Tree Fin. Corp. v. Bazzle, 539 U.S. 1029 (2003) although the movng party could move for summary judgment instead in federal court.

Failure of an arbitrator to adhere to an enforceable choice of law clause is not grounds to vacate an award absent disregard of governing law; Coutee v. Barrington Cap. Grp.L.P., 336 F.3d 1128 (9th Cir. 2003).

Cross Reference: Rodriguez v. American Technologies, Inc., 136 Cal.App.4h 1110 (2006) distinguishes Cronus on grounds the parties expressly agreed to FAA rules. The court denied a stay of litigation and ordered arbitration despite the potential for  inconsistent results.

Mastrobuono and Volt are the subject of considerable commentary. In Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2005) the California Supreme Court attempted to explain the distinction. According to the court in Cronus, Mastrobuono subverted arbitrator authority and inhibited arbitration whereas Volt facilitates arbitration by allowing a state court to stay arbitration and avoid potential conflicts with parties holding contracts without arbitration clauses. Puerto Rico Tel. Co, Inc. v. U.S. Phone Mfg. Co., 427 F.3d 21 (1st. Cir. 2006) summarizes the conflict between Volt and Mastrobuono.

3. Statute of Limitations  [TOC]

A defense to a petition to compel arbitration is failure of a party (Claimant) to comply with the relevant statute of limitations; Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002). Statute of limitations issues are not "arbitrability" issues and are resolved by the arbitrator pursuant to state law unless the arbitration clause references a judicial resolution; Green Tree Fin. Corp v. Bazzle, 539 U.S. 1029 (2003); Kristian v. Comcast,    Corp., 446 F.3d 25 (1st Cir. 2006);  Howsam; Ehleiter v. Grapetree Shores, Inc.,482 F.3d 207 (3d. Cir. 2007); Marie v. Allied Home Mortgage Corp., 402 F.3d 1 (1st Cir. 2005). Cross Reference: California law is similar. See Part II, Ch. XVII- B-2.

a.  Contractual Limitations  [TOC]
In some cases, the arbitration clause accelerates the statutory time for a party to file litigation or a claim. This provision may disadvantage a party, particularly in consumer and employmnt cases. In Title VII cases, a one year state statutory tort limitation in the arbitration clause is superseded by the four year federal statute; Think Jet Info. Resources, Inc., v. Sun Microsystems, Inc., 368 F.3d 1053 (9th Cir. 2004); Anderson v. Comcast, 446 F.3d  2006).

See, In re Yarn Anti-Trust Litigation, 505 F.3d 274 (4th Cir. 2007)  [guardedly approving limitations, and collecting cases, unless inconstent with any substantive rights conferred under federal law].

Cross Reference: Part II, Ch. XVII-B-0-1; Statute of Limitations

4. Laches  [TOC]

Federal courts were in disagreement whether laches is a question for the court or arbitrator; Glass v. Kidder, Peabody & Co., 114 F.3d 946 (4th Cir. 1997); Porter Hayden Co. v. Century Indemnity Co., 136 F.3d 380 (4th Cir. 1998); Trafalgar Shipping Co. v. International Milling, 401 F.2d 568 (2d Cir. 1968) [arbitrator decision].  Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) and Green Tree Fin. Corp v. Bazzle, 539 U.S. 1029 (2003) apparently resolve the split by assigning it to the arbitrator.

5. Counter Claims  [TOC]

At the hearing on the petition to compel arbitration, the only arbitrable issues usually before the court are those sought by petitioner. If the court grants the petition and orders arbitration, the opposing party in the underlying litigation may subsequently file counter claims seeking affirmative relief, cross claims against a third party or set-off. Little decisional law exists, but presumably the arbitrator must resolve any objections to "arbitrability" of counter claims; Woodmen of the World Life Ins. Co. v. Lewis, 118 Fed. Appx. 826 (5th Cir. 2004). The court, having ordered arbitration and stayed litigation as to the original claims, has lost jurisdiction except to entertain injunctive relief or confirm, vacate or correct an award.

In Lefkovitz v. Wagner, 395 F.3d 773 (7th Cir. 2005) the court described the difference between counter claims and set off. The court also invoked 28 U.S.C. 1367 (supplemental jurisdiction). If the court can exercise supplemental jurisdiction over related claims, the arbitrator should also be able to exercise jurisdiction over arbitrable counter claims submitted after the court ordered arbitration. Under this theory, the arbitrator can render a decision on set off or counter claims.

6. Consolidation   [TOC]

Prior to Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) the court could not compel consolidation of separate actions which included arbitration clauses despite identical parties; Government of UK v. The Boeing Co., 998 F.2d 68 (2d Cir. 1993);Weyerhaeuser Co. v. Western Seas Shipping Co., 734 F.2d 635 (9th Cir.1984); Champ v. Siegel Trading Co., 55 F.3d 269 (7th Cir. 1995); Lefkowitz v. Wagner, 395 F.3d 773 (7th Cir. 2005). The FAA does not authorize consolidation, but Howsam held that consolidation of arbitrations is not a "gateway" matter for the court and is the responsibility of the arbitrator; Employers Ins. Co. of Wausau v. Century Indemnity Co., 443 F.3d 573 (7th Cir. 2006). If a case was filed initially in California state court, removed to Federal court, the arbitrator arguably has power to consolidate as does the state court under the local statute; CCP 1281.3; 1282.

In Connecticut General Life Insurance Co. v. Sun Life Assurance Company of Canada, 210 F.3d 771 (7th Cir. 2000) the court interpreted language in the contract permitting consolidation (collecting cases disallowing consolidation).

Consolidation of actions differs from consolidation of arbitrations. In Shaw's Supermarkets, Inc. v. United Food & Commercial Workers Union, 321 F.3d 251 (1st Cir. 2003) the court held that consolidation of multiple grievances should be resolved by the arbitrator. Subsequent to Howsam, in Richard C. Young & Co. Ltd. v. Leventhal, 389 F.3d 1 (1st Cir. 2004) held that consolidation of arbitrations-at least between the parties-is a procedural issue.

Cross Reference: California permits consolidation of multiple arbitration clauses (CCP 1282) but there is an issue whether the statute is preempted by the FAA in a diversity case removed to federal court; Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2005). Fidelity Federal Bank v. Durga Ma, 386 F.3d 1086 (9th Cir. 2004) holds that a choice of law clause in an arbitration agreement refers to substantive state law and the FAA controls procedure in federal court unless the parties agreed otherwise.

In Cronus, the California Supreme Court held that the FAA does not preempt California procedure in state court and the court can consolidate or stay arbitration.

Cross Reference: Part II, State Law, Ch. XVII-H-6: Consolidation

7. Severance   [TOC]

Severance of a clause in an arbitration agreement is a question of state law and applicable if the agreement contains a severance clause; Booker v. Robert Half Int., 413 F.3d 77 (D.C. Cir. 2005); Jackson v. Cintas Corp., 425 F.3d 1313 (11th Cir. 2005) [illegal contract term]; Ferguson v. Countrywide Credit Inds., Inc., 298 F.3d 778 (9th Cir. 2002).

Illegal contracts are subject to severance clauses unless pervasive in the arbitration clause; Gannon v. Circuit City Stores, Inc., 262 F.3d 677 (8th Cir. 2001); Graham Oil Co. v. Arco Products Co., 43 F.3d 1244 (9th Cir. 1995). Depending on the language of the arbitration clause, a court may be able to sever unconscionable conditions and permit arbitration to proceed. If the court concludes the unenforceable conditions permeate the contract, severance is denied; Ferguson, above; Graham Oil Co. v. Arco Products, 43 F.3d 1244 (9th Cir. 1994); Parilla v. IAP Worldwide Services, VI, Inc., 368 F.3d 269 (3d Cir. 2004). If unenforceable and enforceable contractual conditions are integrated and interdependent, the entire integrated portions may be stricken; otherwise the offending terms may be severed; Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987 (9th Cir. 2003); accord, Anders v. Hometown Mort. Services, Inc., 346 F.3d 1024 (11th Cir. 2003).

Cross Reference: This language of severance tracks the California rule; Little v. Auto Stiegler, Inc., 29 Cal.4th 1064 (2002).

See, Ch. XVII-B-6: Severance

8. Class Actions & Classwide Arbitration  [TOC]

In Green Tree Fin. Corp v. Bazzle, 539 U.S. 1039 (2003) the Supreme Court ruled that arbitrators in state court litigation-not the judge-should determine whether an arbitration clause silent on class action permits classwide arbitration, and  Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, (2002) assigned procedural issues to the arbitrator.

The Supreme Court has decided in Stolt-Nielsen S.A. v. AnimalFeeds Int. Corp., 2010 WL 1655826 (U.S.) that the parties must agree to participate in class action  arbitration. The Court distinguished bilateral arbitration as distinct from class action arbitration. This decision is likely to significantly affect the ability of one party to require another party to seek class action status in the absence of a clause in the arbitration agreement or a stipulation.

In Pedcor Mgmt.Co., Inc. Welfare Benefit Plan v. Nations Personnel of Texas, Inc., 343 F.3d 355 (5th Cir. 2003), decided after Green Tree Fin. Corp.and  Howsam, the Fifth Circuit held that under Green Tree the court ascribes resolution of the arbitration clause to the arbitrator if the agreement is silent on who makes the classwide decision.   In Employers Ins. Co. of Wausau v. Century Indemnity Co., 443 F.3d 57 (7th Cir. 2007) the court held classwide arbitrations are a procedural mechanism and under Howsam the arbitrator decides procedural issues; contra, Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006 (. . . “we cannot ignore the substantive implications of this procedural mechansim.”)

The First Circuit has decided two other cases in addition to Kristian. Skirchak v. Dynamic Resources Corp., 508 F.3d 49 (1st 2007) involved classwide waivers, assigning the arbitrability of this issue to the arbitrator or the court contingent on the relationship of the language of the agreement and the state statute; Anderson v. Comcast Corp., 500 F.3d 66 (1st Circuit 2007).

Prohibiting class actions as a form of consolidation is not unconscionable and the absence of discovery does not change the analysis; Caley v. Gulfstream Aerospace Corp., 428 F.3d 1359 (11th Cir. 2005); distinguished in Dale v. ComCast Corp., 498 F.3d 1216 (11th Cir. 2007 ).

Absent a specific direction in the FAA to consolidate cases, Federal courts have refused to order class wide arbitration in the absence of an agreement between the parties. The rationale is based on 9 U.S.C. 4 language that class wide arbitration would not be in accord with the agreement of the parties; Champ v. Siegel Trading Co., Inc., 55 F.3d 269 (7th Cir. 1995). Gree Tree places those decisions in question.

Several federal courts have enforced arbitration clauses barring class actions;  Pleasants v. Am.Express Co., 541 F.3d 853 (8th Cir. 2008); In re Yarn Litigation, 505 F.3d 274 (4th Cir. 2007); Jenkins v First American Cash Advance of Ga. LLC, 400 F.3d 868 (11th Cir. 2005); Livingston v. Assoc. Fin., Inc., 339 F.3d 553 (7th Cir. 2003) [TILA]; Snowden v. Checkpoint Cashing, 290 F.3d 631 (4th Cir. 2002); Johnson v. West Suburban Bank, 225 F.3d 366 (3d Cir. 2000); Randolph v. Gantry Fin. Corp-Ala., 244 F.3d 814 (11th Cir. 2001); Adkins v. Labor Ready, Inc., 303 F.3d 496 (4th Cir. 2002); Skirchak v. Dynamic Resources Corp., 508 F.3d 49 (1st Cir.2007);  Iberia Credit Bureau, Inc. v. Cingular Wireless LLC, 379 F.3d 159 (5th Cir. 2004); Carter v. Countrywide Credit Inds., Inc., 362 F.3d 294 (5th Cir. 2004).

If the underlying case is transferred to Federal court on grounds of diversity, substantive state law controls, and the Third Circuit  refused to enforce class wide arbitration in consumer cases with  low amounts of damage in a state (N.J.) prohibitng class wide arabitration. Decided on the pleadings, the case included a choice of law clause. The court  remanded to the district court for further findings; Homa v. American Express, 558 F.3d 225 (3d Cir. 2009).

Consumers who have signed arbitration clauses in their individual contracts must arbitrate and cannot seek certification of a class despite the underlying federal statute permitting class actions; Johnson v. West Suburban Bank, 255 F.3d 266 (7th Cir. 2000); Carter v. Countrywide Credit Inds., Inc., 362 F.3d 264 (5th Cir. 2004) [employees under FLSA]. The FLSA requires employees to “opt-in” a class only by their written consent.  In Long John Silver’s Restaurants, Inc. v. Cole, 514 F.3d 345 (4th Cir. 2008) the court held FLSA was subject to arbitration but employees could waive the “opt in” provision by the parties’ agreement to an alternate procedure.

Prohibiting class actions is not equivalent to a non-waivable claim despite statutory authority for class actions (Adkins v. Labor Ready, Inc., 303 F.3d 490 (4th Cir. 2002) [FLSA] and these clauses are not unconscionable; Jenkins v. First American Cash Advance of Ga., LLC, 400 F.3d 868 (11th Cir. 2005) [RICO]; Carter; Accord: Burden v. Check Into Cash of Ky. LLC, 267 F.3d 483 (2001); Snowden v. Checkpoint Cashing, 290 F.3d 291 (4th Cir. 2002); Gay v. CreditInform, 511 F.3d 369 (3d Cir. 2007);
[Credit Repair Organizations, Inc.].


The Ninth Circuit disagrees and essentially tracks the Discover Bank (Cal. Sup.Ct.) case refusing to enforce classwide waivers of arbitration; Laster v. AT&T Mobility, LLC, 584 F.3d 849 (9th Cir. 2009); Shroyer v. New Cingular Wirelesss Services, Inc., 498 F.3d 976 (9th Cir. 2007) (although endorsing classwide arbitration in principle); Lowden v. T-Mobile USA, Inc., 512 F.3d (9th Cir. 2008).

Choice of Law Clauses:  If the arbitration clause prohibits classwide arbitration in a California court, the Discover Bank decision prevents enforcement of this provision.  But if a choice of law clause identifies another state which does permit one party to enforce classwide waiver, which law controls?
Or, if the case is removed to federal court, which state law applies? In Hoffman v. Citibank (South Dakota) N.A., 546 F.3d 1078 (9th Cir. 2008) the Ninth Circuit remanded to the district court to take evidence and apply the proper choice of law clause; Homa v. American Express, above.

Note: Considerable confusion arises between state and federal courts ordering class wide arbitration in the same group of cases. In Doctor's Associates Inc. v. Reinert & Duree, P.C., 191 F.3d 297 (2d Cir. 1999) the federal court enjoined a state court parallel proceeding of classwide arbitration initiated in both courts. See also, Cigna Health Care of St. Louis v. Kaiser, 294 F.3d 849 (7th Cir. 2002).

If state law permits classwide arbitration, and the case removed on grounds of diversity, the federal court in New England Energy v. Keystone Shipping Co., 855 F.2d (1st Cir. 1988) enforced state law. But under a California statute permitting consumer class actions (Consumer Legal Remedies Act; CC 1750), the Ninth Circuit held the statute preempted by the FAA; Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003).

Cross Reference: California approves of classwide arbitration and one party may not prohibit the other party from seeking certification in class actions in consumer cases; Discover Bank v. Sup.Ct., 36 Cal.4th 148 (2005). The Discover court held that the FAA does not preempt classwide arbitration and the California Supreme Court refused to enforce a classwide waiver term in the arbitration clause. Garcia v. DirecTV, Inc., 115 Cal.App. 287 (2004) holds that Howsam compels California courts to defer to the arbitrator in deciding whether an arbitration clause permits or denies classwide arbitration; accord, Cable Connection, Inc. v. DIRECTV,  44 Cal.4th 1334 (2008).

See, Ch. XVII-B-11: Classwide Arbitration

Cross Reference: The  California Supreme Court also refused to enforce classwide arbitration waivers in employment cases despite a provision for the employee to “opt out;” Gentry v. Sup. Ct., 42 Cal.4th 443 (2007).Gentry conlicts with Ninth Circuit precedent on this issue but Shroyer (above) undermines  Circuit City Stores, Inc. v. Ahmed, 283 F.3d 1198 (2002); Circuit City Stores, Inc., v. Najd, 294 F.3d 1104 (2002) enforcing the “opt out” provision.   See, Ch. X-C-2: Class Actions. As noted above, numerous other federal courts have enforced class action waivers as long as the moving party is not financially burdened. 

New York: There is no public policy favoring class actions; Ranieri v. Bell Atlantic Mobile, 759 NYS2d 448 (2003).

Note: The question becomes whether classwide arbitration refers to a substantive contractual term, and therefore reviewed as "unconscionable” under Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006); or a remedy (and remedy stripping provisions); or a forum for resolution of a dispute in court or arbitration. In California, Discover Bank held class actions are a means to enforce substantive law. And, as noted above in Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006 (. . . “we cannot ignore the substantive implications of this procedural mechansim.”)

Practice:  Arbitration Service Providers have drafted rules applicable to an arbitrator’s decision to resolve class arbitration claims. AAA rules allow for a 30 day suspension of proceedings to allow judicial review of a class determination award and the arbitrator must render a “reasoned final partial award.” JAMS rules also require a final and reasoned partial award.  Counsel involved in potential class wide arbitration should consult the rules of the relevant arbitration service provider. Both providers track Federal Rule 23 in determining whether to certify the class.
Since the arbitrator is issuing a partial final award, the non-prevailing party can appeal on grounds the arbitrator “exceeded powers;” 9 U.S.C. 10 (a.)

Cross Reference; Part II, Ch. XVII-B-11: Class Actions & Classwide Arbitration

9. Time of the Essence Clause   [TOC]

Whether an arbitration agreement contains a "time of the essence" term is a procedural interpretation and resolved under state law.

10. Federal Rules of Civil Procedure (FRCP):  [TOC]

Rule 81 (a) (3) provides, in part, that "[i]n proceedings under Title 9 U.S.C. 1-16 relating to arbitration . . . [the FRCP] apply only to the extent that matters of procedure are not provided for in [Title 9]". Rule 81 applies only to judicial proceedings before the court and does not import the FRCP to private arbitration proceedings, although the court could hear motions in related proceedings at a hearing pursuant to Rule 42(a) and permit discovery as to the existence of the arbitration clause; Matter of Deiulemar v. M/V Allegra, 198 F.3d 473 (4th Cir. 1999); Weyerhaeuser Co.v. Western Seas Shipping Co., 734 F.2d 635 (9th Cir. 1984).

Pike v. Freeman, 266 F.3d 78 (2d Cir. 2001) holds that Federal Rules of Civil Procedure are inapplicable in an arbitration conducted under the auspices of a private arbitration association; accord, Schoenduve Corp. v. Lucent Techs., Inc., 442 F.3d 727 (2006) [ . . ."we will not develop a code of pleading.]"

In Klay v. United Healthgroup, Inc., 376 F.3d 1092 (11th Cir. 2004) the plaintiff attempted to voluntarily dismiss claims ruled arbitrable pursuant to Rule 41 but the court ruled that only "actions" are subject to dismissal-not claims-and the proper procedure is to amend the complaint.

11. Arbitration Service Provider Rules  [TOC]

Arbitration service providers incorporate their rules when the parties either agree to utilize their service in managing an arbitration, or a pre dispute contract may refer to these Rules as incorporated in the agreement. Reddam v. KPMG, 457 F.3d 1054 (9th Cir.2006) suggests, but does not decide, that an arbitration clause adopting the rules of an organization implicitly includes that organization as the forum.

In Choice Hotels Int., Inc. v. Niteen Hotels, LLC, 103 Fed.Appx. 489 [Non.Cite.] the court rigorously enforced AAA arbitration Rules included in the contract. Based on counsel's non compliance with the Rules, the court affirmed the default entered by the arbitrator; Auwah v. Coverall North America, Inc., 554 F.3d 7 (2009).

See, Lifescan, Inc. v. Premier Diabetic Services, Inc., 363 F.3d 1010 (9th Cir. 2004). Arbitration rules are enforceable; May v. Higbee, 372 F.3d 757 (5th Cir. 2004).

A party who refuses, or fails to pay the costs of arbitration, as provided in the arbitration agreement, is in default and cannot subsequently move to vacate the default and request arbitration under the FAA; Sink v. Aden Ents., Inc., 352 F.3d 1197 (9th Cir. 2003). A party ordered into arbitration who subsequently fails or refuses to pay fees is a different issue; Lifescan, Inc. v. Premier Diabetic Services, Inc., 363 F.3d 1010 (2005). Lifescan is not entirely clear as to its resolution but is cited in Dealer Computer Services v. Old Colony Motors, 588 F.3d 884 (5th Cir. 2009). Dealer Computer holds the failure of one party to pay arbitration fees before or during an arbitration is either a condition precedent (before arbitration ) or subject to the arbitrator service provider rules (during).  

If the arbitration rules permit an arbitrator to award equitable relief, the court will enforce the clause-absent violation of public policy. Appeal on grounds the award was issued in "excess of arbitrator authority" is inapplicable; Brown v. Coleman Co., Inc., 220 F.3d 1180 (10th Cir. 2000).

On NASD Rules incorporation, see, cases collected in Gilbert Street Developers, LLC v. La Quint Homes, LLC, 174 Cal. App.4th 1185 (2009).

Cross Reference: Part II; Ch.XVI-F-4-C

Practice: The Supreme Court has denied certiorari in a case involving an arbitration clause incorporating rules of an arbitration service provider empowering an arbitrator to decide jurisdictional issues of arbitrability; Dunn v. Nitro Distributing Inc., 2006 WL. The Missouri Supreme Court held that the court-not the arbitrator-must decide this issue; Nitro Distributing, Inc., v. Dunn, 194 S.W.3d 399 (Mo. 2006).   The court in Terminix Int. Co., LLP v. Palmer Ranch LP , 465 F.3d 470(11th Cir. 2005) decided the opposite.

12. Mandamus (Mandate)  [TOC]

In the seminal case on federal abstention, Moses H. Cone Memorial Hosp. v. Mercury Const. Co., 460 U.S. 1 (1983) the court refused to issue mandamus when the appellate process of 9 U.S.C. 1291 already served as a jurisdictional predicate. As noted earlier, Moses H. Cone involved removal from state to federal court.

Unlike California courts, the Ninth Circuit imposes strict rules on the use of mandamus (an extraordinary remedy) by parties to circumvent the rule prohibiting appeal from an order granting a petition to arbitrate; 9 U.S.C. 16 (b)(2); Poweragent, Inc. v. Electronic Data Systems, Inc., 358 F.3d 1187 (9th Cir. 2004). Poweragent filed an amended complaint after the trial court had ordered arbitration on the original complaint, changed the factual allegations and contended the arbitrators lacked jurisdiction. The court discussed mandamus, but decided the case on the basis of judicial estoppel (party cannot argue contradictory facts in different tribunals). In re: Sealed Case, 141 F.3d 337 (D.C. Cir. 1998) [discusses the writ in general].

Without citing any federal precedent, the Ninth Circuit in Douglas v. U.S. Dist. Ct. For The Central Dist of CA., 2007 2069542 (9th Cir.) has issued mandamus reversing an order granting a motion to compel arbitration and granting a motion to stay litigation. Citing mandamus precedent only in the litigation context, the court finds mandamus appropriate when the District Court ordered arbitration and granted an order staying litigation of a putative class action claimant despite the clear intent of Congress to deny review of any order granting a stay of any action under FAA 9.U.S.C. 3 or an order directing arbitration to proceed under section (9 U.S.C. 4.); 9 U.S.C. 10 (a) (1) (A) (B) & (b) (1) (2).

Cross Reference: Part II; Ch. XIV-J:  Mandate

13. Administrative Conditions   [TOC]

Federal statutes often require parties to initially file a claim with an administrative agency prior to commencing litigation. The most prominent example is the E.E.O.C. In E.E.O.C. v. Waffle House, 534 U.S. 279 (2002) the Supreme Court held that the administrative agency exercised independent jurisdiction to seek statutory relief. An employee may have signed a contract containing an arbitration clause but the EEOC was not a party to that contract.
Waffle House involved an employment contract and Title VII enforcement by the E.E.O.C. permitting the employee to retain an independent Cause of action and potential intervention in the E.E.O.C. litigation.  In the context of an ADEA claim, the employee’s claim terminates if the E.E.O.C. initiates litigation; E.E.O.C. v. Woodmen of the World Life Insurance Society,  479 F.3d 561 (8th Cir. 2007).
The contract itself may require compliance with administrative conditions similar to conditions precedent that the parties must complete prior to initiating arbitration; Brennan v. King, 139 F.3d 258 (1st Cir.1998). At the administrative hearing, failure of the defense to raise arbitration as an issue does not waive the right to do so at a subsequent trial; Marie v. Allied Home Mortgage Corp., 402 F.3d 1 (1st Cir. 2005).

In University of Tennessee v. Elliott, 478 U.S. 788 (1986) the Supreme Court reviewed state administrative decisions and their preclusive effect. If the administrative hearing replicates arbitration, the award may be conclusive; Burkybile v. Bd. of Education., 411 F.3d 306 (2d Cir. 2005) [applying New York law].

An arbitration clause can also mandate a prospective plaintiff to submit to administrative remedies prior to litigation or arbitration; Parilla v. Worldwide Services, Inc., 368 F.3d 269 (3d Cir. 2004).

14. Voluntary Dismissal of Complaint  [TOC]

A party who files a Complaint and is subsequently served with a motion to compel arbitration by the defendant, can voluntarily dismiss the Complaint. But the court can impose conditions for the dismissal: either participate in arbitration or dismiss the claim. If the plaintiff subsequently seeks arbitration, the defendant is excused from litigating "arbitrability"; Capon v. Ladenburg, Thalman & Co., Inc., 92 Fed.Appx. 400 (2004) [Non Cite.].

15. Sanctions   [TOC]

Courts have routinely issued sanction orders in litigation and are empowered to do so for conduct occurring before granting a petition to compel arbitration. In Jackson v. Cintas Corp, 425 F.3d 1313 (11th Cir. 2005) the court dismissed the Complaint and ordered arbitration. Although dismissing the complaint, it retained jurisdiction to impose sanctions as collateral to the merits.

The Second Circuit has held that the FAA confers authority upon arbitrators to sanction attorneys for "bad faith" conduct occurring during an arbitration; ReliaStar Life Ins. Co. of N.Y. v. EMC National Life Co., 564 F.3d 8  (2d Cir. 2009).  The arbitration clause in the contract provided that each party bear its own costs and fees, a familiar version of the "American Rule."  In the award, the majority of arbitrators in ReliaStar imposed monetary sanctions on counsel representing the non prevailing party based on "bad faith conduct" but without any explanation of the underlying facts.

The Second Circuit held the FAA "grants wide authority to the arbitrator to determine entitlement to attorney fees. . . if the parties so provide, or if authorized by statute . . . or if justified by circumstances in which the losing party acted in bad faith. (Italics in original)."

The opinion cites the Ninth Circuit for a similar rule: Todd Shipyards Corp. v. Cunard Line, LTD, 943 F.2d 1056 (9th Cir. 1991).

The dissenting judge in ReliaStar disagrees with the majority decision on grounds the arbitration clause divests the arbitrator from awarding fees to the losing party, and that the arbitrators exceeded their powers under 9 U.S.C. 10 (a) (4). 

Comment: Whether counsel agree with the decision or not, the absence of any findings of fact, or any summary of the allegedly "bad faith" conduct, coupled with the indeterminite language of the phrase itself is of concern. Cases will always be "fact specific" and neither the FAA nor the court define "bad faith" conduct in arbitration. As the dissent points out, other remedies are available.

I. Substantive Law & Arbitrability  [TOC]

1. Remedies  [TOC]

In PacifiCare Health Systems v. Book, 538 U.S. 401 (2003) the Supreme Court held that arbitration clauses limiting an arbitrator's authority to impose specific remedies, i.e., punitive damages or treble damages, is not a "gateway issue" subject to challenge on a petition to compel arbitration. The PacifiCare court held that the parties must await rendition of an award to challenge the decision of the arbitrator on an appeal from the judgment.

See, this Chapter, Arbitration Fees & Costs

Note: This is not the California rule. See, Part II, Procedural Arbitrability. Ch. XVII-B-2

a. Contractual Remedies  [TOC]

Limitations on damages in an arbitration clause do not necessarily undermine arbitration. As noted, in Pacificare Health Systems, Inc. v. Book, 538 U.S. 401 (2003) the Supreme Court declined to deny enforcement of a clause limiting punitive damages, holding that before the arbitrator ruled on the issue, any court decision was premature.

An arbitration clause will frequently limit remedies the arbitrator can impose, i.e., punitive damages, injunctions, class actions. These are issues for the arbitrator, not the court, because they do not affect validity or formation of the contract; Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003); PacifiCare Health Systems; Bailey v. Ameriquest Mort. Co., 346 F.3d 821 (8th Cir. 2003). Despite this rule, the arbitrator must apply statutory remedies if the finding is in favor of the Claimant; Gilmer v. Interstate/ Johnson Lane Corp., 500 U.S.20 (1991); Faber v. Menard, Inc., 367 F.3d 1048 (8th Cir. 2004); MCI Telecommunications Corp. v. Matrix Communications Corp., 135 F.3d 27 (1st Cir. 1998). In Hadnot v. Bay, LTD, the court merely severed the arbitration clause restricting punitive damages in a Title VII case; Booker v. Robert Half Intern., Inc., 413 F.3d 77 (D.C. Cir. 2005).

The Supreme Court has emphasized the narrowness of the trial court ruling on the validity and enforcement of a petition to compel arbitration. Remedial limits in the arbitration clause are not "gateway issues" and the court should defer to the arbitrator and delay review of the issue until a motion to vacate; Green Tree; PacifiCare Health Systems, Inc. v. Book; Faber v. Menard; Larry's United Super, Inc. v. Werries, 253 F.3d 1083 (8th Cir. 2001).

Cross Reference: Limiting remedies in California employment cases are resolved in a petition to compel arbitration under the doctrine of Unconscionability, infra. Restrictions on punitive damages or the absence of bilateral remedies in an arbitration clause are an element of "unconscionability;" Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2002). See, Part II, Ch. XVII-C-4.

b. Provisional Remedies   [TOC]

            1.  Injunction Prior to Arbitration

A federal court does have power under the FAA to issue an injunction prior to arbitration if the plaintiff conforms to basic rules applicable to injunctive relief, and the interim relief is necessary to preserve the status quo and the meaningfulness of the arbitration process; Toyo Tire Holdings of Americas, Inc, v. Continental Tire North America, Inc., 2010 WL 2496133 (C.A. 9)*   

1). Injunction During Arbitration  [TOC]

A federal court will not issue a TRO or injunctive relief during the course of an arbitration absent exceptional circumstances (Erving v. Va. Squires Basketball Club, 468 F.2d 1064 [2d Cir. 1972]); contra, Ortho Pharmaceutical Corp. v. Amgen, 882 F.2d 806 3d Cir. 1989) but can enjoin collateral litigation to allow arbitration to proceed-unless the agreement specifically provides otherwise; Merrill Lynch, et al. v. Hovey, 726 F.2d 1286 (8th Cir.1984).

2.) Injunction Prohibiting Arbitration  [TOC]

In Textile Unlimited, Inc. v. ABMH and Co., Inc., 240 F.3d 781 (9th Cir. 2001) the court approved issuance of an injunction on venue grounds, apparently ignoring 9 U.S.C. 16(2) prohibiting a court from enjoining arbitration absent grounds to revoke the arbitration clause.

c. Equitable remedies   [TOC]

Equitable remedies are typically a question of state law and arbitrators are empowered to fashion this relief, but Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 29 (1991) requires arbitrators to provide remedies warranted by a federal statute; Faber v. Menard, Inc., 367 F.3d 1048 (2004).

d. Statutory Remedies  [TOC]

In Bailey v. Ameriquest Mort. Co., 346 F.3d 841 (8th Cir. 2003) the court authorized arbitration despite an arbitration clause in the contract forbidding the arbitrator from awarding statutory remedies (FLSA). According to the court, the arbitrator can enforce statutory remedies despite the clause; Faber v. Menard, Inc., 367 F.3d 1048 (8th Cir. 2004).

Cross Reference: In employment arbitration, California courts regard adhesive contracts as potentially unconscionable if the clause limits bilateral remedies. See, Part II, Ch. XVII-C-4.Unconscionable Contracts.

e. Punitive Damages  [TOC]

Punitive damages are generally determined according to state law (Coutee v. Barington Cap. Grp., 336 F.3d 1128 (9th Cir. 2003) and do not violate due process; Davis v. Prudential Secs., Inc., 59 F.3d 1186 (11th Cir. 1995). But treble damages are dissimilar to punitive damages and may be awarded despite a prohibition of punitive damages; Inv. Partners LP v. Glamour Shots, 298 F.3d 314 (5th Cir. 2002).

Cross Reference: Restrictions on punitive damages may constitute "unconscionable " arbitration terms in some contexts and contingent on state law; Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 93 (2000).

Stark v. Sandberg, Phoenix. & von Gontard, P.C., 381 F.3d 793 (8th Cir. 2005) confirmed an "excessive " punitive damages award rendered by an arbitrator. Language in the arbitration clause incorporated Missouri law which prohibits denial of punitive damages. Appellant had cited the Supreme Court decision in BMW of America v. Gore, 517 U.S. 559 (1996) but the court held that damage limits in litigation are inapplicable to arbitration.
Accord: Absent any restriction in the arbitration clause, punitive damages are permitted in arbitration; Barnes v. Logan, 122 F.3d  829 (9th Cir. 1999).

2. Contractual Conditions Precedent  [TOC]

Parties are empowered to insert contractual conditions precedent to arbitration (other than illegal terms). The intent of the contracting parties in drafting an arbitration clause is paramount; Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995). If the contract requires mediation, or informal negotiation (to prevent injudicious jumps to the courthouse), the parties must comply with the conditions, and non-compliance by a party will preclude enforcement of an arbitration clause; Kemiron Atlantic, Inc. v. Aguakem Int., Inc., 290 F.3d 1287 (11th Cir. 2002); HIM Portland, LLC v. DeVito Bldrs., Inc., 317 F.3d 41 (1st Cir. 2003) [no reference to state law] The law of "conditions precedent" is state substantive law enforceable by a federal court sitting in diversity; Westerbeke Corp. v. Dihatsue Motor Co., Ltd., 304 F.3d 200 (2002); HIM Portland, LLC v. DeVito Bldrs., Inc., 317 F.3d 41 (1st Cir. 2003) [no reference to state law]; Alejandro v. L.S. Holding Co., 130 Fed.Appx. [Non Cite.]; HIM Portland, LLC. .

In Westerbeke v. Daihatsu, the court distinguished between a condition precedent and a "preliminary agreement" required to form a contract (applying New York law).

Comment: Howsam v. Dean Witter Reynolds, 537 U.S.491 (2002) places these decisions in question-at least under the FAA. Conditions precedent in a contract are generally a subject of substantive law although not a question of contract formation. Howsam lists several items of "procedural arbitrability" and includes conditions precedent in that category. The Court also referred to conditions related to time limits, i.e., laches, statute of limitations, administrative prerequisites, or the fulfillment of conditions as subject to resolution by the arbitrator. If construed as procedural, the arbitrator decides. Failure or refusal to pay arbitration fees is a condition precedent in Dealer Computer Services Inc. v. Old Colony Motors, Inc., 588 F.3d 884 5th Cir.2009).

The Court also included “waiver” as an arbitrable responsibilitiy. In JPD, Inc. v. Chronimed Holdings, 539 F.3d 388 (6th Cir.)the court distinguished “waiver” in the context of litigation (a judicial decision) as distinguished from “waiver” of contractual conditions precedent as an arbitrable one.

Cross Reference: Ch. XVII, B, 8

Note:  Conditions Precedent are classified as substantive law under Westerbeke but in Part II (State Courts) this subject is discussed as Procedural Arbitrability; Revoking or Enforcing Arbitration Clauses; Ch. XVI-B-8.

3. Prior Arbitration Decisions  [TOC]

a. Evidence  [TOC]

The admissibility in evidence of a prior arbitration award in a subsequent civil action is discretionary with the court; McDonald v. City of West Branch, Mich., 466 U.S. 284 (1984); Costa v. Desert Palace, Inc., 299 F.3d 838 (9th Cir. 2002)[cert granted and affirmed on other grounds]. A prior arbitration award is not precluded in a subsequent civil action and the court may allow it in evidence if consistent with rules set forth in McDonald v. West Branch; Jackson v. Bunge Corp., 40 F.3d 239 (7th Cir. 1994).

See, Burkybile v. Bd. of Education, 411 F.3d 306 (2d Cir. 2005) discussing administrative findings in an award as comparable to arbitration.

b. Summary Judgment  [TOC]

In Collins v. N.Y.C.T. A., 305 F.3d 13 (2d Cir. 2002) the court affirmed summary judgment in litigation based upon a negative award issued by an arbitrator.

The Third Circuit approved an arbitrator’s decision to issue summary judgment and summary disposition of issues; Sherrock Bros., Inc. v. DaimlerChrysler Motors Co.,   Inc, LLC, 2008 WL 63300 (3d. Cir.) [Non.Pub.  The court invoked AAA Rules which  provide the arbitrator with power to grant “legal  and equitable relief.

Practice:  Parties seeking arbitration and a stay of litigation often file a motion for summary judgment, arguing the arbitration clause in a contract is a question of law.  Appeal lies from a denial of either motion. But if the moving party initiates discovery, or delays the proceedings, the opposition can argue the moving party has waived the right to arbitrate.  And in Kahn v. Parsons Global Services, LTD, 521 F.3d 421 (2008 D.C. Cir.) the court held that the moving party  had brought a motion for summary judgment and a motion to compel arbitration but went "outside the pleadings" to argue the motion for summary judgment and this action constituted a waiver.

Comment: Kahn is very questionable.  The moving party had argued all the plaintiff’s alleged injuries occurred during the course and scope of employment and were covered by workers comp.  If they had prevailed on that issue, and the court ordered summary judgment, there would be neither litigation nor arbitration.  

Cross Reference: Ch. XVII-B-9: Summary   Judgment

J. Res Judicata & Collateral Estoppel   [TOC]

Research Note: Res judicata and collateral estoppel are also included under the topics of Procedural Law & Arbitrability; Parties; Abstention. Strictly speaking, neither doctrine is a question of contract "formation" or "issues" subject to arbitration. Collateral estoppel and res judicata are affirmative defenses but can be raised in a motion to dismiss; Walzer v. Muriel, Siebert & Co., 2007 WL 990265 [Not Precedential.]

Res judicata is a doctrine precluding re-litigation of the same claims between the parties or those in privity; John Hancock Mut. Life Ins. Co. v. Olick, 151 F.3d 132 (3d Cir. 1998). The Supreme Court has defined res judicata as the effect of a judgment on the merits in barring a subsequently based claim; McDonald v. City of West Branch, Mich., 466 U.S. 284 (1984). The Court also defines "claim" preclusion as a label for res judicata.

The Supreme Court has defined collateral estoppel as "issue preclusion." Once a court has decided an issue of fact or law necessary to its judgment, that decision may preclude re litigation of the issue in a suit on a different cause of action (or claim) involving a party to the first case; McDonald. These two doctrines do not affect the arbitration clause per se, but are used defensively to prevent litigation or arbitration on issues already decided in a prior arbitration(s); Jacobs v. CBS Broadcasting, Inc., 291 F.3d 1173 (9th Cir. 2002); Javitch v. First Union Secs., Inc., 315 F.3d 619 (6th Cir. 2003); Dadeland Depot, Inc. v. St. Paul Fire and Marine Ins. Co., 479 F.3d 799 (11th Cir.  2007) [action had not accrued at the time of the prior arbitration].

The issue is raised when one party, usually in litigation, asserts a prior award-and confirmed judgment-on the same issues previously resolved in arbitration and therefore estops the opposing party from introducing evidence. The Supreme Court has also referred to a species of "offensive" collateral estoppel, an issue raised by a third party unrelated to previous litigation or arbitration; Parklane Hosiery Co. v. Shore, 439 U.S. 22 (!979); Bear Stearns, et al. v. 1109580 Ontario, Inc., 409 F.3d 87 (2005).

Or, as the Ninth Circuit wrote: “[O]ffensive non mutual collateral estoppel . . . arises when a plaintiff seeks to estop a defendant from relitigating an issue which the defendant previously litigated and lost against another plaintiff” (citing cases); "Defensive" collateral estoppel is raised by a defendant to prevent multiple plaintiffs alleging claims previously lost.  And in all cases where the issue is collateral estoppel or res judicata the arbitrator must give preclusive effect to prior federal judgments; Collins v. D.R.Horton, Inc., 505 F.3d 874 (9th Cir. 2007).

Because arbitrators are not required to render written decisions (Bernhardt v. Polygraphic Co. of America, 350 U.S. 198 [1956]; Electric Data Systems Corp. v. Donelson, 473 F.3d 498 [2d Cir. 2007]) the Second Circuit imposes on the moving party the burden of showing collateral estoppel, "with clarity and certainty", the issue or claim determined by the prior judgment; Postlewaite v. McGraw-Hill, Inc., 411 F.3d 63 (2d Cir. 2005); Postlewaite v. McGraw- Hill, Inc., 333 F.3d 42 (2d Cir. 2004).

The Ninth Circuit holds that collateral estoppel issues are resolved under state law; Manufactured Home Communities, Inc. v. City of San Jose, 420 F.3d 1022 (9th Cir. 2005); 28 U.S.C. 1738; Jacobs v. CBS Broadcasting, Inc., 291 F.3d 1173 (9th Cir.2002);  accord, Community State Bank  v. Strong, 485 F.3d 597 (11th Cir. 2007)  [res judicata also resolved under state law]; Zurich American Ins. Co. v. Watts Industries, Inc., 466 F.3d 577 (7th Cir. 2006); Walzer v. Muriel, Siebert & Co., Inc., 2007 WL 990265 (3d Cir.) [not precedential]; [federal claims not asserted in prior arbitration not collaterally estopped or subject to res judicata]; Dadeland Depot, Inc. v. St. Paul Fire and Marine Ins. Co., 479 F.3d 799 (11th Cir.  2007);  The First Circuit holds that collateral estoppel of an arbitration award is an issue apart from state law and federal law applies (FAA rules); Sevigny v. Employers Ins. of Wausau, 411 F.3d 24 (1st Cir. 2005).

In MACTEC v. Gorelick, 427 F.3d 821 (10th Cir. 2005) the court held a final and binding arbitration award qualifies as res judicata as a judment just as in litigation.  On grounds of relevance, the court in Arlio v. Lively, 474 F.3d. 46 (2d Cir. 2007) disallowed evidence of an arbitration award entered in favor of plaintiff/employee in a subsequent civil action (Title VII) because the prior award ordering  payment of back wages was not an issue in the federal action.

If a party raises the issue of res judicata in a second arbitration between the same two parties, who decides that issue?  According to Shell Oil Co. v. CO2 Committee, Inc., 589 F.3d 1105 (10th Cir. 2009) res judicata is not an arbitrable issue for the court. This resolution is subject to any panel selection clause idenifying the method of panel selection in the arbitration clause and the limited power of a court to order arbitrators;  9 U.S.C. 5.

 

Cross Reference: Part II (State Courts) Ch. XVII-D; Collateral Estoppel and Res Judicata.

Exception: Collateral estoppel and res judicata are potentially inapplicable to Title VII cases filed subsequent to an arbitration under a CBA. In Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974) and Wright v. Universal Maritime Service Corp., 528 U.S. 894 (1998) the Supreme Court allowed a union member unsuccessful in a labor arbitration award conducted under the auspices of the CBA to file Title VII and FLSA litigation. Note: Res judicata as Subject Matter Jurisdiction. See: Unity Comms., Inc., 105 Fed.Appx. 546 (5th Cir. 2004.) [Non.Cite.].

The doctrines of res judicata and collateral estoppel have engendered considerable confusion. Whether issue preclusion or claim preclusion applies is contingent on the nature of the prior proceeding; Perpetual Securities Inc. v. Tang, 290 F.3d 132 (2d Cir. 2002) [NASD inapplicable]; Agrolinz, Inc. Microflo Corp., 202 F.3d 858 (6th Cir. 2000); Witkowski v. Welch, 173 F.3d 192 (1999); Migra v. Warren City School Dist. Bd. of Educ., 465 U.S. 75 (1984); State of Montana v. U.S., 440 US 147 (1979); Mitchell v. Chapman, 343 F.3d 811 (6th Cir. 2003). Courts have merely transferred application of both doctrines to the context of arbitration.

The rule in the Ninth Circuit is outlined in Clark v. Bear Sterns & Co., Inc., 966 F.2d 1318 (9th Cir. 1992): the issue must be identical to the one in prior litigation; the issue must have been litigated; and the issue must have been necessary and critical to the judgment. Accord, Pike v. Freeman, 266 F.3d 78 (2d Cir. 2001). The burden of proof is on the moving party but if the record is adequate, both collateral estoppel and res judicata are applicable in arbitration.

Generally speaking, federal courts adopt state law of these two doctrines and, since neither is a question of formation, i.e., subject to revocation of an arbitration clause on grounds of "law and equity", relevance of a prior arbitration award is a question for the arbitrator on the merits; United Computer Systems, Inc. v. AT&T Corp., 298 F.3d 756 (9th Cir. 2002); Chiron Corp v. Ortho Diagnostic Systems, Inc., 207 F.3d 1126 (9th Cir. 2000); National Union Fire Ins. Co. v. Belco Petroleum, 88 F.3d 129 (2d Cir. 1996). Other courts have concluded that claim and issue preclusion are components of "arbitrability" and the court should decide. John Hancock Mutual Life Ins. Co. v. Olick, 151 F.3d 132 (1998) held that applicability of a prior federal judgment is for the court to decide but a prior arbitration decision is for the arbitrator.

Depending on the "label" of claim preclusion or issue preclusion, two doctrines emerge in these categories:

A prior state judgment confirming an arbitration award is res judicata in state and federal court; Cigna HealthCare of St. Louis, Inc. v. Kaiser, 294 F.3d 849 (7th Cir. 2002); A prior federal court judgment confirming an arbitration award is res judicata in state and federal court; Younger v. Jenson, 26 Cal.3d 397 (1980);

A prior federal judgment on issue preclusion is determined under federal law; Javitch v. First Union Secs., Inc., 315 F.3d 619 (6th Cir. 2003);

Discovery to determine application of collateral estoppel to a subsequent arbitration is appropriate in the Second Circuit; PenneCom B.V. v. Merrill Lynch, et al. 372 F.3d 488 (2d Cir. 2004).

Cross Reference: A state court judgment confirming an arbitration award is res judicata as to subsequent causes of action by the same party or those in privity unless a collateral matter; Benasra v. Mitchell, Silverberg & Krupp, 96 Cal.App.4th 96 (2002); Brinton v. Bankers Pension Service, Inc., 76 Cal.App.4th 550(1999). A party seeking a ruling on the res judicata effect of a confirmed arbitration award can file an injunction to prevent the subsequent case from proceeding, or file declaratory relief to obtain a declaration of rights.

Cross Reference: Under California law, absent an agreement between parties to the arbitration, an award confirmed in a judgment lacks collateral estoppel effect as to third parties. If applicable, the arbitration must also replicate judicial proceedings; Vandenberg v. Sup. Ct., 21 Cal.4th 815 (1999). A federal court applying the Vandenberg rule must invoke California law; Jacobs v. CBS Broadcasting, Inc., 291 F.3d 1173 (9th Cir. 2002).

Note: Whether res judicata applies is also dependent on the language of the arbitration clause.  A “broad” clause is more likely to include an arbitration award that encompasses all issues, including tort arising out of contract; Hudson v. Con Agra Poultry Co., 484 F.3d 496 (8th Cir.2007) WL .

K. Waiver of Right to Arbitrate  [TOC]

Note: Jury Waiver is treated separately: Chapter III-B.

1. Litigation Conduct  [TOC]

Despite an awareness of an arbitration clause in a contract, a party, usually the defendant, waives (probably "forfeits") the right to compel arbitration by litigation conduct; lack of timeliness in filing a petition to compel arbitration; conducting discovery. A defendant may respond to a Complaint by filing any number of procedural devices, i.e., general denial, counterclaims, or discovery motions, but without referencing an arbitration clause in the contract. If the defendant subsequently petitions for arbitration, the plaintiff can urge that petitioner "waived" arbitration by invoking litigation tactics; Price v. Drexel Burnham Lambert, Inc., 792 F.2d 1156 (5th Cir. 1986).

At the hearing on the motion to compel arbitration, the trial judge must decide if the party seeking arbitration had participated in litigation tactics and subsequently sought to compel arbitration to the prejudice of the plaintiff; Creative Solutions Grp., Inc. v. Pentzer Corp., 252 F.3d (1st Cir. 2001); S & R Co. of Kingston v. Latona Trucking, Inc., 159 F.3d 80 (2d Cir.1998); Parilla v. Worldwide Services, VI, Inc., 368 F.3d 269 (3d Cir. 2004); Faber v. Menard, Inc., 367 F.3d 1048 8th Cir. 2003).

Removal of a state case to federal court does not constitute a "waiver" of arbitration; Dantz v. Am. Apple Group, LLC, 123 Fed.Appx. 702 ( 6th Cir. 2003) [Non.Cite.]. Nor does a motion to dismiss or transfer venue; Halim v. Great Gatsby’s Auction Gallery, Inc., 516 F.3d 557 (7th Cir.2008)). An employer who awaits disposition of an EEOC claim filed by an employee does not waive the right to seek arbitration; Marie v. Allied Home Mortgage Corp., 402 F.3d 1 (1st Cir. 2005).

The more difficult question is who decides the "waiver" issue-the court or the arbitrator. Marie holds that the court must decide insofar as delay in litigation conduct is concerned; Ehleiter v. Grapetree Shores, 482 F.3d 207 (3d Cir. 2007). In the Ninth Circuit, "waiver" is an issue for the court; Sovak v. Chugai Pharm. Co., 289 F.3d 615 (9th Cir. 2002); Cox. v. Ocean View Hotel Corp., 539 F.3d 388 (9th Cir.).

Comment: The Sovak rule is correct based upon litigation conduct initiated by a party and occurring prior to any order to arbitrate. In most cases, the defendant engages in litigation conduct arguably waiving (or "forfeiting") the right to arbitrate. Once the case is ordered into arbitration, the court retains vestigial jurisdiction but dilatory tactics by either party is remediable by an arbitrator.

2. Implied Waiver   [TOC]

If the court orders arbitration and the plaintiff is dilatory or refuses to cooperate, the waiver may be implied and the arbitrator can invoke sanctions or enter default; Grumhaus v. Comerica Secs., Inc., 223 F.3d 648 (7th Cir. 2000). Or, if a dilatory defendant seeks to arbitrate after plaintiff has filed litigation, and prejudice to the plaintiff ensues as a consequence of that delay, waiver may be implied. An untimely demand to arbitrate constitutes waiver if prejudice to the other party is found.

If no litigation is on file, and one party demands arbitration but the opposition refuses or fails to participate, the moving party can seek arbitration in District Court; 9 U.S.C. 3/ 4.

The court in In re Tyco Int. Ltd v. Securities, 422 F.3d 41 (1st Cir. 2005) listed relevant factors in assessing delay:

A party who participated in litigation or took action inconsistent with the right to arbitrate;

Whether the party defendant invoked litigation machinery and prepared for litigation before initiating a request for arbitration;

Delay and seeking a stay of litigation or enforcement of arbitration;

Filing a counterclaim without asking for a stay;

Taking advantage of litigation rights, i.e., discovery;

Prejudice to the other party.
  
Waiver can  also be implied from conduct by the plaintiff who invokes the arbitration clause, participates in arbitration and then moves to vacate the award; Nghiem v. NEC Electronic, Inc., 25 F.3d 1437 (9th Cir. 1994); cited with approval in Nghiem v. Fujitsu v.  Microelectronics, Inc., 2006 WL 3617017 (Cal.App.) [Non.Cite.]. A party who willingly and without reservation  allows an issue to be submitted to arbitration cannot await the outcome and then later argue the arbitrator lacked authority to decide the matter. A party who unequivocally objects to arbitrability but participates involuntarily in the arbitration does not preclude challenging the proceedings in court; Environmental Barrier Co., LLC v. Slurry Systems, Inc., 540 F.3d. 598 (7th Cir. 2008).

Note: Tyco presents a difficult question. If the defendant has been indicted, and refuses to answer questions under the Fifth Amendment, but is sued by plaintiff based on a contract containing an arbitration clause, what course of action should the parties take? Tyco suggests the defendant should seek arbitration-if the plaintiff has filed a civil action-and request a stay from the arbitrator.

3. Burden of Proof  [TOC]

A party asserting "waiver" bears a "heavy burden" but the court focuses on whether the party suffered prejudice as a consequence of litigation tactics. The trial court considers whether inherent unfairness has occurred as a result of delay, expense, or damage to the opposing party's legal position. Incurring legal expenses, without more, is insufficient. As above, relevant factors include: time elapsed from commencement of litigation to the request for arbitration; amount of litigation (including substantive motions; discovery; proof of prejudice); PPG Industries, Inc. v. Webster Auto Parts, 128 F.2d 103 (2d Cir. 1997). Federal courts can fashion their own rule of "waiver" of the right to arbitrate: S & H Contractors, Inc. v. A.J. Taft Coal Co., 906 F.2d 1507 (11th Cir. 1990); Fit Tech, Inc. v. Bally Total Fitness Corp., 374 F.3d 1 (1st Cir. 2004).

Numerous cases have resolved trial court rulings on delay occasioned by the defendant and all are fact bound. The ultimate test is prejudice to plaintiff, and, given the heavy burden of proof, efforts to avoid arbitration on this ground have frequently been unsuccessful; In re Tyco Int., Ltd v. Securities Litigation, 422 F.3d 1 (1st Cir. 2005).

Comment: The Ninth Circuit test on waiver is: knowledge of an existing right to compel arbitration; acts or conduct inconsistent with that right; prejudice to the party opposing arbitration resulting from the inconsistent acts; Britton v. Co-op Banking Grp., 916 F.2d 1405 (9th Cir. 1990); confirmed in Brown v. Dillards, Inc., 430 F.3d 1004 (9th Cir. 2005) [defendant breached arbitration agreement].

4. Arbitrator Decision on Waiver  [TOC]

Circuit Courts are not in agreement on whether "waiver" is a procedural issue as described in Howsam v. Dean Witter Reynolds, 517 U.S. 79 (2002) and Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003). See, Nat'l Am. Ins. Co. v. Transamerica Occidental Life Ins. Co., 328 F.3d 462 (8th Cir. 2003) and Tristar Fin. Ins. Agency, Inc. v. Equicredit Corp. of Am., 97 Fed.Appx. 462 (5th Cir. 2004) [Non.Cite].

In a case decided subsequent to Howsam, waiver is an issue of procedural law for the arbitrator; Pro Tech Inds., Inc. v. URS Corp., 337 F.3d 868 (8th Cir. 2004). “Waiver” in this context does not include excessive litigation activities but a defense to arbitrability  on grounds of non compliance with contractual conditions precedent to arbitration; JPD, Inc. v. Chronimed Holdings, 539 F.3d 388 (6th Cir.). FAA rules apply in a choice of law clause for the standard of waiver (litigation conduct) in federal court; First Fidelity Bank, FSB v. Durga Ma Corp., 386 F.3d 1306 (9th Cir. 2004); Sovak v. Chugai Pharm. Co., 280 F.3d 1266 (9th Cir. 2002).

Comment: The Federal test of waiver is roughly comparable to the California test. Counsel attempting to establish waiver bear a "heavy" burden of proof in each jurisdiction. In moving or opposing a petition to arbitrate in this context, each party will assemble the facts as reflected in the PPG Industries, Inc. v. Webster Auto Parts, 128 F.2d 103 (2d Cir. 1997)opinion. The court notes, parenthetically, there is no "bright line." Waiver of the right to arbitrate tends to be fact specific and judicial reasoning differs among the Circuits; Gulf General Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d 476 (5th Cir. (2002); PPG Industries, Inc. v. Webster Auto Parts, 128 F.2d 103 (2d Cir. 1997) In re Tyco Int., Ltd v. Securities Litigation, 422 F.3d 1 (1st Cir. 2005).

If an arbitration clause contains a provision that participation in a judicial proceeding does not waive any rights ("no waiver" clause) , this language refers to the right of a party to seek provisional relief without waiving the right to participate in arbitration; S & R Co. of Kingston v. Latona Trucking, Inc., 159 F.3d 80 (2d Cir. 1998).

A party who does not present an indemnification agreement subject to an arbitration clause when afforded the opportunity to do so, waives claims not pursued; Pike v. Freeman, 266 F.3d 78 (2d Cir. 2001).

Note: Distinguish waiver of the right to compel arbitration from jury waiver.

Cross Reference: California statutorily authorizes the court to hear the issue of whether a party waived its right to compel arbitation; CCP 1282;  See, Part II, Ch. XVII-H.

Note:  Arbitration is a matter of private agreement and the parties can waive their right to contract  and proceed on the merits in litigation; Berenson v. Nat’l. Financial Services, LLC, 485 F.3d 35 (1st Cir. 2007).

L. Waiver of Administrative Forum   [TOC]

In employment litigation, a plaintiff has the right (in some cases the duty) to seek administrative relief prior to filing a Complaint; E.E.O.C. v. Waffle House, Inc., 534 U.S. 579 (2002); [Title VII]. But accelerating statutory statute of limitations requirements in an arbitration clause may disable an employee from vindicating statutory rights and should not constitute a waiver; Think Jet Info. Resources, Inc., v. Sun Microsystems, Inc., 368 F.3d 1053 (9th Cir. 2004).

Chapter V. Awards: Federal Court  [TOC]

Introduction

This Chapter reviews the award issued by an arbitrator in contractual arbitration. In judicial (court annexed) arbitration the award is subject to trial de novo elected by any party; 28 U.S.C. 657(a). In judicial arbitration, absent a motion for trial de novo, the award is confirmed in a judgment; 28 U.S.C. 657(c). In contractual arbitration there is no trial de novo and the only available remedy for the parties is the limited grounds for appeal in 9 U.S.C.16. The arbitrator is not required to write an award; Bernhardt v. Polygraphic Co. of America, 350 U.S. 198 (1956); Electronic Data System Corp. v. Donelson, 473 F.3d 684 ( 6th Cir. 2007); McCarthy v. Citigroup Global Markets, Inc., 463 F.3d 87 (1st Cir. 2006).

The scope of judicial review of awards is extremely narrow. "Neither erroneous legal conclusions nor unsubstantiated factual findings justify federal court review of an arbitral award;” Kyocera Corp.v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987 (9th Cir. 2003). In addition, review of awards is confined to the grounds listed in the FAA (9 U.S.C. 16), and the parties cannot confer jurisdiction on the court by executing an arbitration clause providing review on any other ground, i.e., errors of law or unsubstantiated findings of fact; Kyocera.

The  Supreme Court has agreed with Kyocera on grounds the FAA is the sole source of review of awards, but has not closed the appellate door to other challenges to awards; Hall Street Associates, LLC v. Mattel, Inc., 128 S.Ct. 1396 (2008).

Cross Reference: Cable Connection, Inc. v. DIRECTV, Inc, 44 Cal.4th 1334 (2008) [different rule for review of awards in California  courts].  See, Ch. III-B-15; Drafting Arbitration Clauses

Note: Jurisdiction: A party challenging confirmation of an award, or moving to vacate the award may contend the amount of the “award in controversy” does not meet the $75,000.00 minimum for federal jurisdiction.  Courts have reached different results as cataloged in Choice Hotels Int., Inc. v. Shiv Hospitality, LLC, 491 F.3d 171(4th Cir. 2007). In Choice Hotels the court had stayed the original action and ordered the case into arbitration.   Choice moved to re open the action to confirm the arbitration award of less than the statutory amount of $75,000.00.  The court held jurisdiction is determined by the amount of a good faith demand in the Complaint.

A. Finality of Award  [TOC]

Aside from review of specific interlocutory orders, a court will not review non-final orders, and the arbitrators must render a "mutual, final definite award on the subject matter;" Brandon, et al. v. MedPartners, Inc., 312 F.3d 1349 (11th Cir. 2002); Hart Surgical, Inc. v. Ultracision, 244 F.3d 231 (1st Cir. 2001). Once the arbitrator(s) issues a final award, their duty is done and the doctrine of functus officio applies; Legion Ins. Co. v. VCW, Inc.,198 F.3d 718 (8th Cir. 1999).

Arbitrators are prohibited from redetermining an issue already decided under the doctrine of functus officio. The doctrine applies to final awards and interim awards.  The court will accept the arbitrator’s conclusion that an award is final, or not, in making that determination; In the Matter of Arbitration Between Bosack and Soward, 586 F.3d 1096 (9th Cir. 2009).

Title 9 U.S.C. 9 (judgment confirming award) does not confer subject matter jurisdiction on a District Court to confirm-or vacate-an award rendered by arbitrators who resolved the case absent diversity, a substantial federal question, or without prior judicial intervention to compel arbitration; Greenberg v. Bear, Stearns & Co., 220 F.3d 22 (2d Cir. 2000) [NASD arbitration]; Perpetual Securities v. Tang, 290 F.3d 132 (2d Cir. 2002). Venue to file the motion to confirm (or vacate, correct or modify) may be made in any District Court; Cortez Byrd Chips, Inc. v. Bill Harbert Const. Co., 529 U.S. 193 (2000).

Note: NASD awards do not constitute "state action" and do not qualify for review under the 14th Amendment; Perpetual Securities v. Tang, 290 F.3d 132 (2d Cir. 2002); nor under the Fifth Amendment; Desiderio v. NASD, 193 F.3d (2d Cir. 1999); FDIC v. Air Florida System, Inc., 822 F.2d 833 (9th Cir. 1987)

1. Partial Award   [TOC]

Title 9 U.S.C. does permit an appeal from an order confirming or denying confirmation of a. . . partial award. Hart Surgical, Inc. v. Ultracision, 244 F.3d 231 (1st Cir. 2001 reviews other Circuit Court decisions that recognize exceptions to the rule of "finality" (Hart @234) but a court cannot confirm (or vacate) a partial award resolving liability, but not damages, unless the parties agree. An arbitrator cannot re-determine an award but can reserve jurisdiction (to resolve issues of fees, costs, interest or other arbitrable issues) if characterized as an "Interim" Award; Millmen Local 550, et al. v. Wells Exterior Trim, 828 F.2d 1373 (9th Cir. 1987).

 The Eighth Circuit requires an arbitration agreement to specifically require an entry of judgment-an extremely narrow interpretation although statutorily required (9 U.S.C. 9); PVI, Inc. v. Ratiopharm GMBH, 135 F.3d.1252 (8th Cir. 1998); Carter v. Health Net of Cal., Inc., 374 F.3d 830 (9th Cir. 2004); Perpetual Securities, Inc. v. Tang, 290 F.3d 292 (2d Cir. 2002); Greenberg v. Bear, Stearns & Co., 200 F.3d 20 (2d Cir. 2000). The Fourth Circuit disagrees as long as the parties agree to arbitrate and conduct an arbitration; Oorvis Communications L.L.C. v. Wilson, 549 F.3d 303 (4th Cir. 2008). 

Comment: Statutory time limits to serve a noticed motion to confirm an award is one year (or to vacate/modify/correct awards is three months) after an award is served; 9 U.S.C. 9; 12; Photopaint Techs LLC v. Smartlens Corp., 335 F.3d 152 (2d Cir. 2003). Service of process in arbitration is similar to service of an action.

Title 9 U.S.C. 9 requires notice to the adverse party and provides for service.

Note: If a court assigns the certificaition of aa classs to the arabitrators, they will issue a “paartial final award.

2. Ambiguous Award  [TOC]

A trial court unable to interpret an ambiguous award-usually a fact specific case-should remand the award to the panel for clarification; Tri-State Business Machines, Inc. v. Lanier Worldwide, Inc., 221 F.3d 1015 (7th Cir. 2000); M & C Corp. v. Erwin Behr GMBH & Co., KG, 411 F.3d 749 (6th Cir. 2005). The purpose of remand is clarification of the award, and the court should request the arbitrator to rewrite the award to achieve finality; U.S. Energy Corp. v. Nukem, Inc., 400 F.3d 822 (10th Cir. 2005) (collecting cases from other Circuits to the same effect).

"Clarification" is not a ground listed for appeal, and the arbitrator on remand cannot change the text of the award. The better practice is to obtain an order from the court to hold a noticed hearing and allow all parties to argue their respective positions.

 In  Transtech Inds., Inc. v. A &Z Septic Clean, LLC, 2008 WL 762100 (3d Cir.) [Non.Pub.] the court held that the doctrine of “functus officio” of the arbitrator is subject to exceptions if the award is ambiguous: (1) an arbitrator can correct a mistake apparent on the face of the award; (2) the award does not adjudicate a submitted issue, and therefore the arbitrator has not exhausted his function; (3) the award leaves doubt whether the submission has been clearly  executed.
The First Circuit agrees that the doctrine of “functus officio” is moribund, and the arbitrator can “clarify”an award as long as there is no fundamental change in the original award; Eastern Seaboard Construction Co. Inc. v. Gray Construction, Inc., 553 F.3d 1 (1st Cir. 2008).

Note: May v. Higbee Co., 372 F.3d 757 (5th Cir. 2004) indicates there is no time limit on "clarification" of an award.  Presumably the “clarification” can precede the judgment on the award.

Cross Reference: CCP 1284 allows the arbitrator to correct an award upon application by a party; See, Ch. XXI-C: Awards  

3. Collateral Attack on Award  [TOC]

A party cannot bypass the exclusive and comprehensive nature of the FAA by attempting to arbitrate claims in a second proceeding. All allegations grounds to vacate an award must be brought under the FAA; Decker v. Merrill Lynch, Pierce, Fenner & smith, Inc., 205 F.3d 906 (6th Cir. 2000).

B. Modification or Correction of Award  [TOC]

A notice of  motion to modify or correct an award must be served on the adverse party or his attorney within three months after the award is filed or delivered; 9 U.S.C. 12. This statutory requirement is juridsdictional and a court will not accept a late filing; Choice Hotels Int., Inc. v. Shiv Hospitality, LLC, 491 F.3d 171(4th Cir. 2007).  Statutory grounds for correction or modification of an award by the trial court are listed in 9 U.S.C. 11. The grounds are:

1. Evident Miscalculation [TOC]

Ground: "Evident miscalculation of figures or evident material mistake in the description of any person, thing or property referred to in the award;" 9 U.S.C. 11 (a)

In AIG Baker Sterling Heights, LLC v. American Multi-Cinema, Inc. 502 F.3d 1100  (11th Cir. 2007) the non-prevailing party discovered  a “mistake” in the computation of the award subsequent to its confirmation.  The prevailing party agreed but  the First Circuit held the arbitrator made no “mistake” at the time of the award and 9 U.S.C. 11(a)was inapplicable.

Title 9 U.S.C. 11(a) authorizes the trial court to modify an award for "evident miscalculation of figures [w]here the record [before] the arbitrator demonstrates an unambiguous and undisputed mistake of fact and the record demonstrates strong reliance on that mistake by the arbitrator. . . ;" Prestige Ford v. Ford Dealer Computer Services, Inc., 324 F.3d 391 (5th Cir. 2003); accord, Marie v. Allied Home Mortgage Corp., 402 F.3d 1 (1st Cir. 2005). Or, the arbitrator can unilaterally complete an award to correct a mistake apparent the face of the award; Peabody Western Coal Co., v. UMW, 99 Fed.Appx.116 (9th Cir.) [Non Cite].

2. Issues Not Submitted [TOC]

Ground: "Arbitrator(s) renders an award on a matter not submitted to them, unless the matter does not affect the merits of the decision upon matters properly submitted." 9 U.S.C. 11 (b).  A Court may strike all or a portion of an award pertaining to an issue not at all subject to arbitration; Kyocera Corp. v. Prudential-Bache Trade Servs. Inc., 341 F.3d 998 (9th Cir. 2003).

3. Imperfect in Form: [TOC]

Ground: "An award imperfect in matter of form not affecting the merits of the dispute;" 9 U.S.C. 11 (c).  The court can order modify or correct the award so as to effect the intent of the arbitrator and promote justice between the parties;

4. Attorney Fees  [TOC]

If the parties submit the issue of attorney fees to the arbitrator, the award may include this issue; Coutee v. Barrington Cap. Corp., 336 F.3d 1128 (9th Cir. 2004); Comedy Club, Inc. v. Improv West Associates,  502 F.3d 1100 (9th Cir. 2007); Cert. Grtd.and vacated based on Hall Street Assocs. L.L.C. v. Mattel, 128 S.Ct.1286. On remand, Comedy Club decision amended January 23, 2009 without change in judgment; 553 F.3d 1277 9th Cir. 2009).

 

Practice: 9 U.S.C. 13 requires a party moving to confirm, modify or correct an award to file the order for entry of judgment and include: the agreement; selection or appointment of any additional arbitrator or umpire; each written extension of the time within which to make the award.

Counsel must also: file the award; give notice to the parties based upon an application to confirm, modify or correct the award and a copy of each order of the court upon such application. The judgment entered has the same force and effect as is rendered in a civil action in court.

5. Interest  [TOC]

The Second Circuit draws a distinction between a judgment confirming an award on the merits and pre judgment interest. Upon application of the prevailing party, the court can amend the judgment to accurately reflect the judge’s intent under Rule 60 (a); Rosen v. Webb, 473 F.3d 498 (2d Cir. 2007).

Unless the arbitrator rules differently, when a court confirms an arbitration award into a judgment, any prejudgment interest in diversity cases is governed by state law; AIG Baker Sterling Heights, LLC v. American Multi-Cinema, 508 F.3d 995 (11th Cir. 2007).   In California, state law provides that prejudgment interest is computed from the date of the award. In federal court, a confirmed award is computed at the federal rate (28 U.S.C. 1961); Fidelity Federal Bank, FSB v. Durga Ma Corp., 387 F.3d 1021 (9th Cir. 2004).

6.  Severance of Illegal or Unenforceable Terms [TOC]

In Kyocera Corp. v. Prudential-Bache, 341 F.3d 87 (1997) the Ninth Circuit held that an  arbitration clause permitting judicial review for errors of law and fact (unenforceable) is not sufficiently central to an arbitration clause to defeat severability.

Cross Reference: Ch. XXI-F-5-d. Severance of Illegal or Unenforceable Terms

Note: Upon motion of the prevailing party, the Second Circuit has allowed the trial court to correct an arbitration award previously confirmed in a judgment to include computation of pre-judgment interest under FRCP 60 (a); Rosen v. Webb, 473 F.3d 498 (2d Cir. 2007).

C. Confirmation of Award  [TOC]

On motion of the prevailing party, 9 U.S.C. 9 authorizes the court to confirm an arbitration award (and enter judgment) within one year absent a motion to vacate, correct or modify the award pursuant to sections 9 U.S.C. 10;11.  Petitions to vacate and correct must be filed within three months of the award; U.S.C. 12.

Although the arbitration agreement does not necessarily require the parties to agree that the award be enforced as a judgment, the conduct of the parties is relevant in determining their intent to arbitrate; conduct the arbitration; receive an award; and confirm the award with a judgment; Oorvis Comminications L.L.C. v. Wilson, 549 F.3d 303 4th Cir. 2008.). 

D. Vacating Award  [TOC]

Title 9 U.S.C. 10 lists the statutory grounds to vacate an arbitration award but the notice of motion to vacate must be properly served or delivered to the adverse party or attorney within three months after filing and delivering the award ; 9 U.S.C. 12. This statute is jurisdictional and the court will not accept a late filing; Choice Hotels Int., Inc. v. Shiv Hospitality, LLC, 491 F.3d 171(4th Cir. 2007). The FAA is the exclusive remedy to allege a tainted award; Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987 (9th Cir. 2003); Corey v. New York Stock Exchange, 691 F.2d 1205 (6th Cir.1982).

That the FAA is the sole remedy to vacate an award is not universally accepted, and according to Roadway Package System, Inc. v. Kaiser, 257 F.3d 287 (3d Cir. 2001) the parties may craft their own rules. This is not the Ninth Circuit rule; Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987 (9th Cir. 2003)

9 U.S.C. 10 is an independent action to deny entry of judgment on an appealable ground and unrelated to a petition to compel arbitration; Green Tree Fin. Corp-Alabama v. Randolph, 531 U.S. 79 (2000); Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003); Cortez Byrd Chips, Inc. v. Bill Harbert Const. Co., 529 U.S. 193 (2000). The burden of proof is on the moving party; Bear, Stearns, Inc., et al. v. 109580 Ontario, 409 F.3d 87 (2d Cir. 2005).

If the award is divisible, the court may vacate part of the award and leave the remainder in force; Comedy Club, Inc. v. Improv West Associates, 502 F.3d 1100 ( 9th Cir. 2007).  This issue is most likely to arise if arbitrators allegedly exceeded their authority; Cert. Grtd. and vacated based on Hall Street Assocs L.L.C. v. Mattel, Inc.128 S.Ct.( 2008). On remand to the Ninth Circuit, no change in judgment: 553 F.3d 1042 (9th Cir. 2009)

See, this Chapter, Section D-4: Arbitrator Exceeds Authority

Preliminary issue: Filing a motion to vacate an award is governed by the FAA and does not confer subject matter jurisdiction (including diversity jurisdiction) independent of an arbitration ordered by the District Court regardless of whether a "federal question" is involved. The analysis of jurisdiction of a petition to vacate an award is no different than a petition to compel arbitration; Carter v. Health Net of Cal., Inc., 374 F.3d 830 (9th Cir. 2004); Luong v. Circuit City Stores, Inc., 368 F.3d 1109 (9th Cir. 2004; [opinion withdrawn]), therefore the parties must establish diversity or another ground for subject matter jurisdiction ; Greenberg v. Bear Stearns Co., 220 F.3d 22 (2d Cir. 2000); Perpetual Securities v. Tang, 290 F.3d 292 (2d Cir. 2002). An exception: if a party alleges in good faith that the arbitrator has "manifestly disregarded" the law, jurisdiction is proper; Greenberg @27.

See, this Chapter V-F: Manifest Disregard

Title 9 U.S.C. 10 authorizes vacatur upon "application" under the following circumstances:

1. Corruption, Fraud or Undue Means of Arbitrator   [TOC]

Title 9 U.S.C. 10 (a)(1) states an award may be vacataed if procured by corruption, fraud or undue means. Evidence of fraud must be established by clear and convincing evidence; Mitchell v. Ainbinder, 2007 WL 177896 (6th Cir.) [Non.Cite.]; Bonar v. Dean Witter Reynolds, 835 F.2d 1378 (11 th Cir. 1988).

Although this language is broad, it is roughly comparable to actionable fraud or arbitrator malfeasance; National Cas. Co. v. First State Ins. Grp., 430 F.3d 492 (1st Cir. 2005).

A party seeking to vacate an award pursuant to this Section must establish that the undue means were not discoverable by due diligence before or during the arbitration; Trans. Chem. Ltd v. China Nat. Mach. Import & Export Corp., 161 F.3d 314 (5th Cir. 1998). If discovered, and brought to the attention of arbitrators without further action, vacatur is inapplicable; A.G. Edwards & Sons, Inc. v. McCollough, 967 F.2d 1401 (9th Cir. 1992).

Cross Reference: See, Part II, Appeal in State Courts, Ch. XXII wherein the court discusses the distinction between internal and external fraud.

2. Evident Partiality of Arbitrator   [TOC]

10 U.S. C. (a)(2): A court may set aside an award if one the arbitrators displays "evident partiality", or there is "corruption" of the arbitrators;" Commonwealth Coatings v. Continental Casualty Co., 393 U.S. 145 (1968). This section is inapplicable to party arbitrators whose neutrality is not in doubt; Sphere Drake Ins. Co. v. All American Life Ins. Co., 307 F.3d 617 (7th Cir. 2002); Positive Software Solutions, Inc. v. New Century Mortgage Corp., 476 F.3d 278 (5th Cir. 2007).

Comment: The increasing use of arbitrators in a wide variety of disputes has caused increased visibility and awareness of their background. When the FAA was enacted in 1925, parties expected to retain arbitrators familiar with a particular trade or industry and widely known for their expertise; Commonwealth Coatings Corp. Co. Expansion of the scope of arbitrable categories has changed that dimension of arbitration, and critics have become insistent on knowing whether an arbitrator maintains, or has maintained, a personal or business relationship with witnesses, parties or lawyers from the opposing side (excluding party arbitrators).

In Sphere Drake, the court commented on the use of industry experts. Despite friendship or industry relationships, many lawyers prefer them as arbitrators rather than a disinterested judge; Harter v. Iowa Grain Co., 220 F.3d 544 (7th Cir. 2000). In a motion to vacate, based upon an arbitrator's nondisclosure of personal or business relationships with a party, the Ninth Circuit held that the moving party must have actual knowledge of these disqualifying facts. Constructive knowledge requires a party to seek disclosure prior to the award; Fidelity Federal Bank v. Durga Ma Corp., 386 F.3d 1306 (9th Cir. 2004).

In many cases, these potential conflicts arise with party arbitrators who are frequently partial to one side. This knowledge waives any right to object if a party is aware, or becomes aware, of potential conflicts; Fidelity Federal Bank.

Although California has enacted legislation addressing non disclosure of personal and business relationships (CCP 1281.9), the FAA includes only a single statutory opportunity for a party to challenge an arbitrator who fails to disclose prior relevant relationships with the opposing side: an appeal on grounds the arbitrator displayed "evident partiality"; 9 U.S.C. 10 (a)(2). That phrase is obviously capable of subjective analysis as evidenced by the 6-3 decision of the United States Supreme Court in Commonwealth Coatings Corp.

In Commonwealth, the majority held that the neutral arbitrator failed to disclose a prior business relationship with the party who prevailed in the arbitration and, accordingly, he created an "impression of bias." The Court vacated the award pursuant to 9 U.S.C.10.

The dissent argued that the statute prohibits "evident partiality" in the conduct of the arbitration; that all parties personally knew the arbitrator and never objected to his role; that both party arbitrators signed the award. The majority and minority opinions both agree on the importance of an impartial arbitrator who does not display an "impression of bias." But application of that principle is fact specific and not easily cabined verbally. The test, ostensibly objective rather than subjective, is an invitation to the appellate dance.

One Court of Appeals tried: "An arbitrator is obligated to disclose those facts that create a reasonable impression of impartiality. . . or [disclose] information which would lead a reasonable person to believe that a potential conflict exists;" University Commons-Urbana LTD v. Universal Constructors, Inc., 304 F.3d 1331 (11th Cir. 2002). Whether that explanation advances the understanding of "evident partiality" is questionable.

Compare the liberal interpretation of "evident partiality" in the Ninth Circuit (Schmitz v. Zilveti, 20 F.3d 1043 [9th Cir. 1994]) with rejection of its analysis in Positive Software Solution v. New Century Mortgage Corp. (5th Cir. 2007) [ “Schmitz is an outlier that lends little support to Positive Software;” Gianelli Money Purchase Plan & Trust v. ADM Investor Services, Inc., 146 F.3d 1309 (11th Cir. 1998); Abdullah E. Al-Harbi v. Citi-Bank, N.A., 85 F.3d 680 (D.C. Cir 1996); ANR Coal Co., Inc. v. Cogenetrix of No. Car., Inc., 173 F.3d 493 (4th Cir. 1999).

In  New Regency Productions, Inc. v. Nippon Herald Films, Inc., 501 F.3d 1101 (9th Cir.2007)  the Ninth  Circuit affirmed its Schmitz rationale and held lack of an arbitrator’s personal knowledge of ongoing negotiation with a party does not preclude a finding of “evident partiality.” Moreover, the arbitrator may have an independent duty to investigate.  Compare this rationale with the 2d Circuit in Applied Indus. Materials Corp. v. Ovlar, 492 F.3d 132 (2d Cir. 2007) confronting a similar issue of disclosure.

Cross Reference: California has enacted comprehensive disclosure legislation: CCP 1281.9.  See, Part II; Ch. XIX.

Note: Party arbitrators are not embraced within the doctrine of “evident partiality; Winfrey v. Simmons Food, Inc., 495 F.3d 549 (8th Cir. 2007)

3. Arbitrator Misconduct  [TOC]

Arbitrators are guilty of misconduct "in refusing to postpone the hearing, upon sufficient cause shown, or refusing to hear evidence pertinent and material to the controversy; or other misbehavior prejudicing the parties;" 9 U.S.C.10 (a)(3). To warrant vacating an award, the ". . . misconduct so affects the rights of a party...[that] he was deprived of a fair hearing;" Hoteles Condado Beach & Convention Ctr. v. Union De Tronquistas., 763 F.2d 34 (1st Cir. 1985); National Cas. Co v. First Insurance Grp., 490 F.3d 492 (1st Cir. 2005); Coastal Gen. Const. Services Corp. v. Virgin Islands Housing Authority, 98 Fed.Appx. 156 (3d Cir. 2004) [Non.Cite]. The hearing must be "fundamentally fair;" Generica LTD v. Pharmaceutical Basics, Inc., 125 F.3d 1123 (7th Cir. 1997).

In tripartite arbitrations the parties can discuss the issues with a party arbitrator-at least prior to submission of pre hearing briefs; U.S. Life Ins. Co. v. Superior Nat’l. Ins. Co., 591 F.3d 1167 (9th Cir. 2009). The court also holds that the arbitrators did not commit misconduct in hearing testimony  from expert witnesses outside the presence of the parties as long as they offered counsel the opportunity to brief and argue their discussion.  U.S. Life holds any evidence of misconduct under FAA 10 (a) 3 must be prejudicial (collecting cases).

Non compliance with an arbitrator's discovery order is not a "refusal to hear evidence." If a party refuses to disclose evidence ordered by the arbitrator, the latter may draw a negative inference; National Casualty Co. v. First State Insurance Group, 430 F.3d 492 (1st Cir. 2005).

Laws v. Morgan Stanley Dean Witter, 452 F.3d 398 (5th Cir. 2006) summarizes potential grounds for vacating an award based on the arbitrator's denial of a motion to continue the arbitration. Prejudice, absence of  diligence, or fault of the party who seeks a continuance are relevant; 9 U.S.C. 10 (a) (3).  Review is de novo to determine whether the arbitrator acted within the ambit of discretion; Laws.

Arbitrators are not bound by rules of evidence but are governed by a rule of fair procedure; Bernhardt v. Polygraphic Co. of America, 350 U.S. 198 (1956). Title 9 U.S.C. 10 subsection (a)(3) confirms this provision. Obviously cases in this category are fact specific and bright lines are infeasible; Generica Ltd. v. Pharmaceutical Basics, Inc., 125 F.3d 1123 (7th Cir. 1997); In re Tempo Shane Corp. v. Bertek, 120 F.3d 16 (2d Cir. 1997); In re Time Cons. Co., Inc., 43 F.3d 1041 (6th Cir. 1995); Hoteles Condado Beach; Karaha Bodas Co. v. Perusahaan, 364 F.3d 274 (5th Cir. 2004).

Cross Reference:  California statutory rules for vacating an award are discussed in Awards; Ch. XXI-F-8-d.  California courts are not required to vacate awards under the FAA; SWAB Financial LLC v. E*Trade Securities, LLC , 150 Cal.App.4th 1181 (2007); Ovitz v. Schulman, 133 Cal.App.4th 830 (2005).

4. Arbitrator Exceeds Powers  [TOC]

Tile 9 U.S.C. 10 (a)(4) states as a ground for vacatur: arbitrators “exceed their powers, or imperfectly execute them, so that a mutual, final and definite award upon the submitted subject matter was not made.”

In commercial arbitration, it is important that arbitrators identify issues for resolution according to the terms of the contract or they may "exceed their powers;" Geneva Securities, Inc. v. Johnson, 138 F.3d 688 (7th Cir. 1998) [NASD case]; United Food & Comm. Workers Int. Union v. Foster Poultry Farms, 74 F.3d 169 (9th Cir. 1995). Legal or factual error is not grounds for vacatur and an award and will be upheld if it “draws its essence . . . from the agreement and not merely the arbitrator's own brand of industrial justice; United Paperworker's Int'l. Union v. Misco, Inc., 484 U.S.29 (1987); Solvay Pharmaceuticals, Inc. v. Duramed Pharmaceuticals, Inc., 442 F.3d 471 (6th Cir. 2006) adds that the award fails to draw its "essence" from the agreement when 1) "it conflicts with the express terms of the agreement; 2) it imposes additional requirements not expressly provided for in the agreement; 3) it is not rationally supported by or derived from the agreement; 4) it is based on 'general considerations of fairness and equity instead of the agreement," citing United Paperworkers.

The Ninth Circuit explains: "Arbitrators exceed their powers . . . not when they merely interpret or apply the governing law incorrectly, but when the award is completely irrational, or exhibits a manifest disregard of law;" Kyocera Corp. v. Lapine Tech. Corp., 341 F.3d 987 (9th Cir. 2003). The court may correct or modify an issue in the award; Kyocera.

Failing to adhere to a choice of law clause agreed upon by the parties is grounds to vacate unless the error is harmless (Coutee v. Barrington Cap. Grp., 336 F.3d 1128 (9th Cir. 2003) although this error arguably constitutes grounds for an arbitrator exceeding authority. Accord, Edstrom Inds., Inc. v. Companion Life Ins. Co., 516 F.3d 546 (7th Cir. 2008)
Halim v. Great Gatsby’s Auction Gallery, 516 F.3d 557 (7th Cir. 2008);  Rich v. Spartis, 516 F.3d 75 (2d Cir. 2008.

Cross Reference,  XVII-B-5; Choice of Law

Arbitrators are given broad, but not unlimited, powers to award remedial relief if the agreement includes a clause authorizing equitable powers (Bowen v. Amoco Pipeline Co., 254 F.3d 925 (10th Cir. 2001) but not to issue a TRO to maintain the status quo; Comedy Club, Inc. v. Improv West Associates, 502 F.3d 1100 (9th Cir. 2007); Cert. Grtd. and vacated based on Hall Street Assocs. L.L.C. v. Mattel, Inc., 128 S.Ct. 1286. (2008). On remand, no change in judgement; Comedy, 533 F.3d 1277 9

Cross Reference: CCP 1281.8 permits the parties to seek injunctive relief during the course of, or prior to, commencement of the arbitration if the arbitral result would be rendered ineffective. The law is uncertain whether an arbitrator can issue a TRO or injunctive relief under this Section. The court could also intervene to resolve a motion to disqualify the arbitrator; CCP 1281.9. The FAA (9 U.S.C. 1-16) contains no comparable statute permitting provisional relief for parties during an arbitration. Comedy Club, Inc. (Cert.Gtrd. and vacated as above). On remand, no  change in judgment, 553 F.3d 1277 (9th Cir. 2009).

See, Provisional Remedies, Ch. XVII-E-3.

Note: In a  noticed motion to modify or vacate (9 U.S.C. 12), the court noted the parties had not produced "a single document" listing the precise issue submitted to arbitration; Metromedia Energy, Inc. v. Enserch Energy Services, Inc., 409 F.3d 574 (3d Cir. 2005).   The court held that arbitrators have authority to interpret the scope of party submissions to identify arbitrable issues. The scope of an arbitrator's jurisdiction extends to issues not only explicitly raised by the parties but all issues implicit with a submission agreement; Michigan Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826 (9th Cir. 1995). "The arbitrator's interpretation of his powers is entitled to the same level of deference as his determination on the merits;" Shoenduve Corp. v Lucent Techs., Inc., 442 F.3d 727 (2006). See, Submission Agreement, Ch. IV-F-3.

If the parties agree to submit an issue not within the scope of the order to arbitrate, but nevertheless submit evidence on the subject, the argument that the arbitrators "exceeded their powers" is rejected; Brabham v. A.G. Edwards & Sons, Inc., 376 F.3d 377 (5th Cir. 2004).

Comment: Written Opinions. Arbitrators are under no obligation to write their award; Puerto Rico Telephone Co., Inc. v. U.S. Phone Mfg. Co., 427 F.3d 21 ( 1st Cir. 2005); McCarthy v. Citigroup Global Markets, Inc., 463 F.3d 87 (1st Cir. 2006 ). Courts have noted the difficulty of determining whether arbitrators exceeded their authority in the absence of a written opinion; Bernhardt v. Polygraphic Co. of America, 350 U.S. 198 (1956). The lack of a written decision often forces the court to resolve allegations without a record. In the event of a prior arbitration, or litigation, the doctrine of collateral estoppel or res judicata may be asserted and a party must document whatever record is available from the prior proceeding.

If an arbitrator writes an opinion: the court: presumes the arbitrator acted within the scope of authority; this presumption is rebuttable if the opinion contains an ambiguity; vacatur is permitted if it is obvious from the written opinion that an arbitrator exceeded authority: Metromedia Energy, Inc. v. Enserch Energy Services, Inc., 409 F.3d 574 (3d Cir. 2005).

In addition, the courts may  invoke state law of collateral estoppel, which may vary among jurisdictions. A choice of law clause is essential to determine the correct state law.

Cross Reference: This may not be the rule in California; CCP 1283.4.

E. Rehearing of Arbitration  [TOC]

If the court vacates an award, and notice is timely, the court may, in its discretion, direct a rehearing of the arbitration by the arbitrator; 9 U.S.C. 10 (b). On remand, the court should avoid any message indicating the decision the arbitrator should render nor give directions to the arbitrator on practice or process; McCarthy v. Citigroup Global Markets, Inc., 2006 WL 2673424 (1st Cir. 2006).

Note the diferencce between vacating an award and remanding (for “clarification”) of an award; Edstrom Inds. Inc. v. Companion Life Ins. Co., 516 F.3d 546 (7th Cir. 2008); Rich v. Spartis, 516 F.3d 248 (2d Cir.2008).

See, this Chapter, V-A; Finality of Award

Cross Reference: Ch. XXI-F-4: Clarification of Award

F. Manifest Disregard  [TOC]

Note: The discussion below was written prior to the Supreme Court decision in Hall Street Associates L.L.C. v. Mattel, Inc., 128 S.Ct. 1396 (2008).  The Court in Hall Street limited appeal of arbitration awards to the grounds listed in the FAA (9 U.S.C. 10) and the role of “manifiest disregard” is now in question.  The federal circuit courts continue their disagreement interpreting the Supreme Court decision. The Second Circuit holds the doctine is still viable; Coffee Beanery v. WW, L.L.C., 300 Fed. Appx., 415  (6th Cir. 2008) [Non.Pub]. The Fifth Circuit unequivocally holds the doctrine is no longer viable; Householder Grp. v. Caughran, 2009 WL 4016450 (5th Cir. 2009) Non.Cite); accord, Medicine Shoppe Intern., Inc. v. Turner Investments, Inc., 2010 WL 2836621 (C.A.8 (Mo.). The Ninth Circuit also held the doctine  does not disturb its precedent; Comedy Club, Inc. v. Improv West Assocs., 553 F.3d 1277 (9th Cir. 2009); In the Matter of the Arbitration Between  Bosack v. Soward, 586 F.3d 1096 (9th Cir. 2009) [reheard] the court held “manifiest disregard,” and an “irrational award” remain viable after Hall St. 

The Ninth Circuit, whether it has abandoned “manifest disregard or not, issued and opinion severely limiting challenges to an award pursuant to the grounds of the FAA; 9 U.S.C. 10; Lagstein v. Certain Underwriters at Lloyd’s, London, 607 F.3d (9th Cir. 2010).         

The FAA severely limits statutory grounds for vacating an arbitration award (9 U.S.C. 16) and the doctrine of "manifest disregard'' is a judicially created non-statutory ground for vacating an award; Gilmer v. Interstate/Johnson, 510 U.S. 1139 (1994); Wilko v. Swan, 346 U.S. 427 (1953); 9 U.S.C. 10.

First Options of Chicago v. Kaplan, 514 U.S. 938 (1985) permits a party to challenge an award on the non statutory ground of an arbitrator's "manifest disregard" of the law. The record must clearly demonstrate that the arbitrator recognized the applicable law and ignored it: Luong v. Circuit City Stores, Inc. 368 F.3d 1109 (9th Cir. 2004) [opinion withdrawn]; Michigan Mut. Ins. Co. v. Unigard Ins. Sec. & Ins. Co., 44 F.3d 826 (9th Cir. 1995).

Manifest disregard" of the "facts" is not a statutory ground to vacate; Coutee v. Barrington Cap. Grp., 336 F.3d 1128 (9th Cir. 2003); Halligen v. Piper Jaffrey, Inc.,148 F.3d 197 (2d Cir. 1998) appeared to so hold but was clarified in GMS Group LLC v. Benderson, 326 F.3d 75 (2d Cir. 2003).

In Brabham v. A.G.Edwards & Sons, Inc., 376 F.3d 377 (5th Cir. 2004) the Fifth Circuit canvassed the doctrine of "manifest disregard" extensively. The court rejected an award rendered "arbitrarily and capriciously" as a ground for vacating an award; accord, Kergosien v. Ocean Energy, Inc., 390 F.3d 346 (5th Cir. 2004). Compare Simula, Inc. v. Autoliv, Inc., 175 F.3d 716 (9th Cir.1999).

More recently, the Fifth Circuit unequivocally concludes Hall Street eliminated the non statutory ground of an arbitrator’s “manifest disregard” of the law as a basis to vacate an award. The only grounds for appeal from a judgment confirming an award, or denying vacatur, are those listed in the FAA; 9 U.S.C.10; Citigroup Markets v. Bacon, 2009 WL 542780 (5th Cir.).
The Ninth Circuit held that manifest disregard of the law “remains a valid ground for vacatur because it is part of section 9 U.S.C.10 (a) (4) [arbitrators exceed their powers];” Comedy Club, Inc. v. Improv West Assocs., 553 F.3d 1277 (9th Cir. 2009); Bosack v. Soward, above.
The Fifth Circuit decision collects the cases from other circuits.   

The test of "manifest disregard,” assuming it is still viable, is difficult to apply, complicated by the fact that arbitrators need not write their opinions or state their reasons for an award; Puerto Rico Telephone Co., Inc. v. U.S. Phone Mfg. Corp., 427 F.3d 21 (1st Cir. 2005); Electronic Data Systems v. Donelson, 473 F.3d 684 (6th Cir. 2007); Bull HN Information Systems v. Hutson, 229 F. 3d 321 (1st Cir. 2000). According to the Second Circuit, the parties must bring applicable legal principles to the attention of the arbitrator(s) who refuses to apply the law; Biscanin v. Merrill Lynch & Co., 407 F.3d 905 (6th Cir. 2005); Wallace v. Buttar, 378 F.3d 182 (2d Cir. 2004). Arbitrators who are not lawyers are particularly vulnerable under this interpretation.

Circuit Courts are not in agreement whether an arbitration award can be set aside on grounds the arbitrator "manifestly disregarded" the law; Westerbeke Corp. v. Daihatsu Motor Co., Ltd, 304 F.3d 200 (2d Cir. 2002); George Matteson, Inc. v. Tiffany & Co., 248 F.3d 577 (7th Cir. 2001). In Merrill Lynch, Pierce, Fenner & Smith v. Bobker, 808 F.2d 930 (2d Cir. 1986) the court attempts to define the contours of this doctrine by stating: "Any arbitral error" must be obvious and capable of being instantly observed; "disregard" implies a knowledge of generally accepted legal principles and a wilful refusal to apply them; Stark v. Sandberg, et al., 381 F.3d 793 (8th Cir. 2004); Merrill Lynch, et al., @ 933-4; Prestige Ford v. Ford Dealer Computer Services, Inc., 324 F.3d 391 (5th Cir. 2003); See also, R.M. Perez & Assoc., Inc. v. Welch, 960 F.2d 534 (5th Cir. 1992); Patten v. Signator Ins. Agency, 441 F.3d 230 (4th Cir. 2006) [arbitrator ignored plain and unambiguous contract language].

Manifest disregard is not arbitrator legal error; Luong v. Circuit City Stores, Inc., 368 F.3d 1109 (9th Cir. 2004) [opinion withdrawn]; Michigan Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826 (9th Cir. 1995).  Despite these two opinions, in Carter v. Health Net of Cal., 374 F.3d 830 (9th Cir. 2004) [“the governing law allegedto have ben ignored by arbitrators must be well defined, explicit, and clearly established”] and Collins v. D.R. Horton, Inc.,  505 F.3d 874 (9th Cir. 2007).  And on its  own, the Ninth Circuit vacated an award on the ground the arbitrator misapplied California law on the invalidity of covenants not to compete; Comedy Club, Inc. v. Improv West Associates, 502 F.3d 1100 (9th Cir. 2007); Cert. Grtd. and vacated based on Hall Street Assocs v. Mattel, 128 S.Ct 1286 (2008). On remand, the (the Court of Appeal held no change in judgment; Comedy Club, 553 F.3d 1277 (9the Cir. 2009).

In the Eleventh Circuit, "manifest disregard" requires evidence that the arbitrator was "conscious of the law and deliberately ignored it;" B.L. Harbert Int., LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir. 2006). This court also considers an award in violation of public policy, rendered capriciously, and authorizes use of labor precedent. But the court reminds parties that deference to awards is nonetheless the standard.

Cross Reference: The doctrine of manifest disregard is inapplicable in state court; Siegel v. Prudential Ins. Co. of America, 67 Cal.App.4th 1270 (1998).

G.  Public Policy [TOC]

The court also will consider an award contrary to public policy as a ground to vacate; Sarofim v. Trust Co.of the West, 440 F.3d 213 (5th Cir. 2006); Rollins, Inc. v. Black, 167 Fed. Appx. 798 (11th Cir. 2006). This non-statutory exception emanates from the Supreme Court decision in United Paperworkers Int’l. Union, AFL-CIO v. Misco, 484 U.S. 29 (1987). Although a labor case, in Twin Galleries LLC v. Media Arts Grp., 476 F.3d 598 (8th Cir. 2007) the court applied this rule to a choice of law clause in an arbitration agreement.

See, Public Policy, IV-G-4.

H.   Deposing the Arbitrator  [TOC]

The courts have repeatedly rebuffed attempts to depose the arbitrator in order to determine the basis of an award. But the Second Circuit cited a distinction between deposing an arbitrator on statutory grounds and allegations of "manifest disregard;" Hoeft v. MVL Grp., Inc., 343 F.3d 57 (2d Cir. 2003).

I. Discovery Disputes  [TOC]

Discovery disputes are not grounds to vacate an award as this category is not listed as a ground for appeal in 9 U.S.C. 10; Prestige Ford v. Ford Dealer Computer Services, Inc., 324 F.3d 391 (5th Cir. 2003).

J. Venue  [TOC]

A court with the power to stay an action and order arbitration has the additional power to confirm an award; Cortez Byrd Chips, Inc. v. Bill Harbert Const. Co., 529 U.S. 193 (2000). In the Ninth and Second Circuits, a petition to vacate an award on grounds of "manifest disregard" is considered a "federal question" and confers subject matter jurisdiction; Greenberg v. Bear, Stearns & Co., 220 F.3d 22 (2d Cir. 2000); Perpetual Securities v. Tang, 290 F.3d 132 (2d Cir. 2002). Luong v. Circuit City Stores, Inc., 368 F.3d 1109 (9th Cir. 2004) [withdrawn]; George Matteson, Inc. v. Tiffany & Co., 248 F.3d 577 (7th Cir. 2001).

Practice: Petitions (applications) to vacate an award and motions to confirm or modify an award, are separate proceedings under the FAA and the parties must be diverse for jurisdictional purposes; Vulcan Chemical Technologies, Inc. v. Barker, 297 F.3d 332 (4th Cir. 2002). Parties should file directly in District Court; Green Tree Fin.Corp.-Alabama v. Randolph, 531 U.S. 79 (2000).

Chapter VI. Appeal: Federal Court  [TOC]

A. Appellate Jurisdiction  [TOC]

The FAA allows appeal from any "final decision with respect to arbitration"; 9 U.S.C. 16 (a) (3). A court order to dismiss the underlying action in conjunction with an order compelling arbitration is a "final decision.," and subject to appeal. The proper court order is to stay the action and order arbitration, rendering the decision interlocutory and not subject to appeal; Green Tree Fin. Corp. v. Randolph, 531 U.S. 79 (2000). There is no appeal from an order compelling arbitration; 9 U.S.C. 16 (b) (2).

Generally speaking, the right to appeal requires entry of a judgment but Congress has permitted interlocutory appeals from an order denying a petition to compel arbitration in addition to conventional appeals from a judgment based on a trial court confirming or vacating an award; 9 U.S.C. 16 (1)(A) & (B); (1)(3). Title 9 U.S.C. 16 reinforces Congressional policy to render decisions denying a petition to compel arbitration appealable even when interlocutory, but an order granting a petition to compel arbitration is not appealable; May v. Higbee Co., 372 F.3d 757 (5th Cir. 2004); 9 U.S.C. 16 (3). An arbitrator cannot redetermine an award, but can reserve jurisdiction to resolve issues of fees, costs, interest or other arbitrable issues under the rubric of an "interim award" without risking “finality”; Millmen Local 550 v. Wells Exterior Trim, 828 F.2d 1373 (9th Cir. 1987).

The FAA requires  a “written” contract between the parties to invoke its jurisdiction (9 U.S.C. 1)  but some courts have allowed a non signatory to enforce arbitration clauses signed by signatories  based on principles of “equitable estoppel” [See, Ch. IV-F-B-2: Non signatory Enforcing Contract against Signatory].   In Carlisle v. Mallet-Prevost, Colt & Mosle, 521 F.3d 597 (6th Cir. 2008) the court held that  parties “inextricably intertwined” with each other satisfied the writing requirement of the FAA on principles of equitable estoppel. Cert.Grtd. 129 S.Ct. 529 (2008).

Green Tree is the definitive case on "finality" of a decision. District Courts now stay the litigation rather than dismiss but some cases hold various alternatives to staying litigation are permissible and disallow appeal of an order compelling arbitration; CitiFinancial Corp. v. Harrison, 453 F.3d 245 (5th Cir. 2006 ["administrative dismissal"]; Dees v. Billy, M.D., 394 F.3d 1290 (9th Cir. 2005) ["administrative closure"].

Compelling compliance with a subpoena is a final order and subject to appeal; Dynegy Midstream Services v. Trammochem, 451 F.3d 89 (2d Cir. 2006).

Practice: A notice of appeal must be filed in a civil case within 30 days after the judgment or order appealed from is entered; 28 U.S.C. 2107 (a); F. R.  App. 4 (a) (1)

1. Standard of Review  [TOC]

The appellate court reviews arbitration awards de novo although deferentially. Review is based on questions of law, not facts, but a record of an arbitration is frequently modest, if it exists at all; Manion v. Nagin, 392 F.3d 294 (8th Cir. 2004). Appellate courts narrowly review an arbitrator's decision interpreting contractual language. "It is the arbitrator's decision the parties bargained for;" United Steelworkers of America v. Enterprise Wheel and Car Corp., 363 U.S. 593 (1960).

Federal courts are becoming impatient with appeal of arbitration awards: " Arbitration's allure is dependent upon the arbitrator being the last decision maker in all but the most unusual cases. . . if arbitration is to be a meaningful alternative to litigation, the parties must be able to trust that the arbitrator's decision will be honored sooner instead of later; Rollins, Inc., v. Black, 167 Fed.Appx. (11th Cir. 2006)  [Non. Cite]. Counsel who ignore this admonition may be subject to sanctions; Rollins, Inc.

These rules are in accord with Supreme Court jurisprudence: A court reviews confirmation of an award de novo, deferentially, and on narrow grounds; First Options of Chicago, 514 U.S. 938 (1995); Sarofim v. Trust Co. of the West, 440 F.3d 213 (5th Cir. 2006).

The FAA is the sole statutory ground for appeal from an interlocutory order or judgment; Hall Street Associates, LLC v. Mattel, Inc., 128 S.Ct. 1396(2008.)  but the court can sever an arbitration clause permitting the parties to appeal and thereafter enforce the judgment; Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987 (9th Cir. 2003). Erroneous legal conclusions and insubstantial factual findings are not subject to review; Kyocera Corp.

Note: As noted earlier, federal courts permit appeals on the non statutory ground of "manifest disregard." See, Ch. V-F, Awards. Private parties cannot limit appellate review of "manifest disregard" error. Hoeft v. MVI Corp., Inc., 343 F.3d 57 (2d Cir. 2003). Whether “manifest disregard” still survives Hall Street is an open question.

A trial court finding of "ambiguity" in the arbitration clause and denying an order to arbitrate, is grounds for appeal, i.e., in May v. Higbee Co., 372 F.3d 757 (5th Cir. 2004) there was no question the agreement was "written", only an issue of its effect under state law.

2. Waiver of Appeal  [TOC]

Parties can agree, in principle, to waive appellate review, displacing the FAA rules if they explicitly agree to do so; Bowen v. Amoco Pipeline Co., 254 F.3d 925 (10th Cir.2001). Absent agreement, the default rules of the FAA apply despite a choice of state law; Puerto Rico Tel. Co, Inc. v. U.S. Phone Mfg. Corp., 427 F.3d 21 1st Cir. 2005).

Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987 (9th Cir. 2003) holds that parties cannot confer jurisdiction by contract; Schoch v. Info. USA, Inc., 341 F.3d 785 (8th Cir. 2003). The Third Circuit disagrees, and holds the parties may agree to vacatur standards other then as provided in the FAA; Roadway Package Sys., Inc. v. Kayser, 257 F.2d 287 (3d Cir. 2001). However, even if the parties agree the award is "binding and non-appealable" that does not prevent an appeal from the award on grounds of arbitral misconduct, bias, or manifest disregard of the law; Rollins, Inc., v. Black, 167 Fed.Appx. (11th Cir. 2006) [Non.Cite.].

In MACTEC v. Gorelick, 427 F.3d 821 (10th Cir.2005) [cert. denied] the court concluded that despite an express waiver of appeal, which is enforceable, the trial court retained the power to review the award although the appellate court could not.

Although an appeal lies from an order denying arbitration and refusing to stay litigation, the court must have jurisdiction to review the order; In re Universal Service Fund Telephone Billing Practice Litigation v. Sprint Communications Co., L.P., 428 F.3d 940 (10th Cir. 2005) the court held that 9 U.S.C. 3 and 4 require a written agreement and in its absence the doctrine of equitable estoppel cannot serve as a jurisdictional basis to appeal an interlocutory order.
The Supreme Court has granted cert on this issue; Arthur Anderson, L.L.P. v. Carlisle,  129 S.Ct. 529 (2008) U.S.).

This rule is applicable when non-signatories move  to compel a signatory to arbitrate.  Other courts disagree with USFTB and will compel arbitration under equitable estoppel. 
See, Sourcing Unlimited, Inc. v. Asimo Int., Inc., 525 F.3d 38 (1st Cir. 2008).  Sourcing Unlimited (an international arbitration case) acknowledges that federal courts will compel non signatories to arbitrate but not all have addressed the appeal issue.

B. Appealable Orders   [TOC]

The FAA permits an appeal may be taken from:

1. Order Refusing Stay of Litigation  [TOC]

A party may appeal from an order refusing a stay of litigation pursuant to 9 U.S. C. 3; 9 U.S.C. 16 (a) (1)(A).

Gulfstream Aerospace Corp. v. Mayacamas Corp, 485 U.S. 271 (1988) held 28 U.S.C. 1292 (a)(1)(appeals in civil cases from final orders) does not serve as a basis for an appealable order, although this case was decided in litigation, not arbitration.

2. Order Denying Petition to Compel Arbitration  [TOC]

A party may appeal from an order denying a petition to compel arbitration pursuant to 9 U.S.C. 4 ; 9 U.S.C. 16 (a)(1)(B).

The appellate court initially undertakes inquiry into whether the parties have entered into a binding agreement as part of an appeal from an interlocutory order; May v. Higbee Co., 372 F.3d 757 (5th Cir. 2004. An order denying a petition to compel is an interlocutory order but appealable regardless of the label the trial court affixes or the wording of the order, i.e., delay to allow discovery, improper venue; Ansari v. Qwest Comm. Corp., 414 F.3d 1214 (10th Cir. 2005).

3. Order Confirming or Denying Confirmation of Award:  [TOC]

An order confirming or denying confirmation of an award or partial award is appealable; 9 U.S.C. 16 (a)(4).

This Section requires an arbitrator to render a . . ."mutual, final and definite award upon the subject matter. . [submitted]." Jurisdiction for the court requires a final disposition, not interlocutory; A "final "award must be intended by the arbitrator to be [a] complete determination of every issue submitted; Hart Surgical, Inc. v. Ultracision, Inc., 244 F.3d 231 (1st Cir. 2001).

Title 9 U.S.C. 16 (a) (1)(D) permits an appeal from a partial award but tentative or interim awards should not be confirmed; Millmen Local 550 v. Wells Exterior Trim, 828 F.2d 1373 (9th Cir. 1987). Parties can carve out a portion of a dispute, and confirmation is possible, when that issue(s) is resolved; Pacific Reinsurance Mgmt. Corp., v. Ohio Reinsurance Corp., 935 F.2d 1019 (9th Cir.1991).

In class actions, an arbitrator can issue a partial award certifying a class or denying certification.  See, Class Actions, Ch. IV-H-8.

4. Order Correcting or Vacating award  [TOC]

Title 9 U.S.C. 16 (a)(1)(E): An order modifying, correcting, or vacating an award is subject to appeal.

5. Order Enjoining Arbitration   [TOC]

Title 9 U.S.C. 16 (a)(2): An interlocutory order granting, continuing, or modifying an injunction against arbitration is a final order although temporary in nature; McLaughlin Gormley King Co. v. Terminix Int. Co., 105 F.3 1192 (8th Cir.1997). Refusal to enjoin an injunction of an order granting arbitration is not an appealable order; ConArt, Inc.v. Hellmuth, 504 F.3d 1208 (11th Cir. 2007).

Title 28 U.S.C. 1292(a) also authorizes federal courts to exercise appellate jurisdiction "granting, continuing, modifying, refusing or dissolving injunctions, or refusing to dissolve or modify injunctions,. . . Whether this section is in addition to, or subject to 9 U.S.C. 16 (a) (1) (2) [a final decision regarding an arbitration subject to Title 9 U.S.C. 16] is an open question; In re Universal Service Fund Telephone Billing Practice Litigation v. Sprint Communications Co. L.P., 428 F.3d 940 (10th Cir. 2005); DSMC, Inc. v. Convera Corp., 349 F.3d 679 (DC Cir. 2003); Brandon, et al. v. Medpartners, Inc., 312 F.3d 1349 (11th Cir. 2002).

A party filing an action to enjoin arbitration is not restricted to the judicial district designated in the arbitration clause; Textile Unlimited, Inc. v. A..BMH and Co., Inc., 240 F.3d 781 (2001).

Comment: The wording of 9 U.S.C. 16 attempts to insure no evasion of arbitration by trial court intervention.

6. Order Dismissing Action:  [TOC]

Dismissal of an action is distinct from a stay order and qualifies as a final decision subject to appeal within the meaning of the statute; Title 9 U.S.C. 16 (a)(3):Green Tree Fin. Corp.-Ala. v. Randoph, 531 U.S. 79 (2000). As noted above, the District Court should not dismiss the underlying action, but stay it. To avoid an appeal, the court may "administratively close" the case; Dees v. Billy, M.D., 394 F.3d 1290 (9th Cir. 2005);  American Heritage Life Ins. Co. v. Orr, 294 F.3d 397 (8th Cir. 1996).

C. Non-Appealable Grounds   [TOC]

Congress has also provided that an appeal may not be taken from:

1. Order Staying Litigation  [TOC]

An interlocutory order pursuant to 9 U.S.C. 3 granting a stay of litigation is not appealable; 9 U.S.C. 16 (b)(1)

2. Order Compelling Arbitration  [TOC]

An interlocutory order pursuant to 9 U.S.C. 4 directing arbitration to proceed is not appealable; 9 U.S.C. 16 (b)(2).

3. Order Refusing to Enjoin Arbitration  [TOC]

An interlocutory order pursuant to 9 U.S.C. 16 (b)(4) refusing to enjoin arbitration is not appealable.

Denial of an injunction against arbitration is an order compelling arbitration and not an ordinary denial of a preliminary injunction; ConArt, Inc. v. Hellmuth-Obata, Kassabaum, Inc., 504 F.3d 1208 (11th Cir. 2007); Southeast Resource Recovery Facility Authority v. Montenany Int. Corp., 973 F.2d 711 (9th Cir. 1992).

As noted earlier in this Chapter, Circuits are split on whether 28 U.S.C.1292 (a)(1), authorizing federal courts to issue injunctions, confers jurisdiction to review arbitration orders and subject to appeal; Gulfstream Aerospace Corp. v. Mayacamas Corp, 485 U.S. 271 (1988); Fit Tech, Inc. v. Bally Total Fitness Holding Corp., 374 F.3d 1 (1st Cir. 2004) [collecting case law]; DSMC, Inc. v. Convera Corp., 349 F.3d 679 (D.C. Cir. 2003).

D. Sanctions  [TOC]

Sanctions are collateral to the issues on appeal. The court may impose sanctions even if dismissing the litigation and ordering arbitration; Jackson v. Cintas Corp., 425 F.3d 1313 (11th Cir. 2005). Frivolous appeals are also subject to sanctions; Rollins, Inc. v. Black, 167 Fed.Appx, 798 (11th Cir. 2006) [Non.Cite.]; DMA Intern. Inc. v Quest  Comms. Intern., 585 F.3d 1341 (10th Cir. 2009); B.L. Harbert Int., LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir.).

E. Private Panel Appeal  [TOC]

The Seventh Circuit has permitted the parties to contract for a non-judicial appellate review of awards; Chicago Typographical Union v. Chicago Sun Times, 935 F.2d 1501 (7th Cir. 1991). The Ninth Circuit agrees; Kyocera Corp. v. Prudential-Bache, 341 F.3d 987 @1000 (9th Cir. 2003).

Cross Reference: California also permits this process; Cummings v. Future Nissan, 128 Cal.App.4th 321 (2005). Arbitration service providers may offer appeal of an award to another panel of arbitrators. Case law on the procedure, substantive and evidentiary rules for implementing an appeal are not subject to judicial appeal and counsel should consult service provider rules. Part II, Ch. XXII.

 

Chapter VII. Court Annexed (Judicial) Arbitration: Federal Court  [TOC]

The Alternative Dispute Resolution Act of 1998 encourages use of alternative dispute resolution processes including early neutral evaluation, mediation, infra, minitrial and, with limitations, non-binding arbitration with consent of the parties; 28 U.S.C. 651(a)-(d).

A. Exemption from Arbitration  [TOC]

Exempt from arbitration is an action based on a right secured by the U.S.Constitution; 28 U.S.C. 654 (a)(1); civil rights cases, 28 U.S.C. 1343 (civil rights & elective franchise); or cases consisting of money damages in excess of $250,000 (28 U.S.C. 654 [a][(3]). Counsel must certify damages exceed that amount; 28 U.S.C. 654(c).

B. Consent to Arbitrate (non-binding)  [TOC]

Judicially annexed arbitration requires the parties to consent "freely and knowingly” to the process and is non-binding, i.e., a party dissatisfied with an arbitration award may file for a TDN; 28 U.S.C. 654 (b)(1). Refusal to participate in an arbitration does not prejudice a party in subsequent proceedings; 28 U.S.C. 654 (b)(2).

C. Arbitrator Powers  [TOC]

The powers of the arbitrator are statutorily defined and include the right to conduct hearings, administer oaths or affirmations and render awards; 28 U.S.C. 655(a).

D. Arbitrator Subpoenas   [TOC]

Arbitrators may issue subpoenas for attendance of witnesses and production of documents at the hearing consistent with guidelines in FRCP 45; 28 U.S.C. 656. In re Sealed Case, 141 F.3d 337 (D.C. Cir. 1998)-a civil case not under the FAA.

E. Arbitrator Disclosure & Disqualification  [TOC]

Disqualification of neutral arbitrators (and mediators) in court annexed programs is governed by 28 U.S.C. 653(b) on grounds set forth in 28 U.S.C. 455 (applicable to judges and includes Rules of Professional Responsibility standards as developed by each District Court). Nothing in the FAA applies to the duty of an arbitrator to disclose potential conflicts of interest but the issue may be moot if an affected party files a trial de novo (TDN) after a judicially ordered arbitration.

If the parties conducted an arbitration (consentual & non-binding) and the court confirmed an award in a judgment, apparently no statutory remedy exists to challenge a subsequently discovered arbitrator's non disclosure of conflict of interest. The court might permit a motion to vacate the award on grounds of fraud.

F. Trial de Novo (TDN)  [TOC]

Judicially ordered arbitration preserves the right of a party dissatisfied with an award to seek trial in a judicial forum by filing a request for trial de novo (TDN). An arbitration award, served by the prevailing party or plaintiff, must be " filed promptly after the arbitration hearing is concluded" with the referring Clerk in the District Court. Unless a party files a written demand for trial de novo within 30 days after filing the award, the award is entered as a judgment; 28 U.S.C. 657 (c)(1).

Failure to comply with the 30 day statutory requirement of 28 U.S.C. 657 is tantamount to a waiver of trial; Hamilton v. J. C. Penney Co., Inc , 127 Fed. Appx. 47) [Non. Cite.].

Note: This rule is draconian but the court does not specifically assert the rule is "jurisdictional." The court recommends counsel file a motion seeking an "enlargement of time" to respond to a motion to strike the judgment on the award pursuant to Fed.R.Civ. Pro. 6(b). A timely motion for TDN is required but compliance is neither jurisdictional nor must all parties request TDN; CNA Fin. Corp. v. Brown, 162 F.3d 1334 (11th Cir. 1998). Compare, Hamilton, above.

Evidence of the arbitration, the nature of the award and the conduct of the proceedings are inadmissible at a subsequent trial (28 U.S.C. 657) unless otherwise admissible under the Federal Rules of Evidence (28 U.S.C. 657 [c]).

If a party files a TDN pursuant to 28 U.S.C. 657 the statute provides the motion precludes any reference to it in subsequent proceedings ("as though an arbitration had never occurred.)" In D' Orio v. Majestic Lanes, Inc., 370 F.3d. 354 (3d Cir. 2004) a party moved for a TDN and subsequently withdrew it. Based on the statutory language, the court held the motion to withdraw was a nullity.

G. Arbitrator Immunity  [TOC]

Arbitrator immunity is statutorily conferred (28 U.S.C. 655 [c]) in judicially annexed arbitration but arbitrators must subscribe to an oath and are subject to disqualification under 28 U.S.C. 653 & 655 (same oath & disqualification applicable to judges).

See, 28 U.S.C. 655 (b)(1)(2); 28 U.S.C. 453; 455.

Under general common law, immunity covers arbitrators; Int. Med. Grp. v. AAA, 312 F.3d 833 (7th Cir. 2002).

Although a dissatisfied party cannot appeal the award, an appellate court can review the court order and entry of judgment pursuant thereto; Hamilton v. J. C. Penney Co., Inc , 127 Fed. Appx. 47) [Non. Cite.]

Cross Reference: Part II, Ch. XX-L; Arbitrator Immunity

H. Judgment  [TOC]

Judgment entered after an award is not appealable; 28 U.S.C. 657(a).

Practice: The Alternative Dispute Resolution Act authorizes each District Court to draft rules or administration; 28 U.SS.C. 2071 (a).  Rules of District Courts throughout California very and counsel must review local Federal Rules of Court.  IN the Central District of California, Local Rule 16-14 Policy re Settlement describes settlement procedures and includes General orders.  Exhibit A.

Chapter VIII. Court Annexed (Judicial) Mediation: Federal Court  [TOC]

The Alternative Resolution Act of 1998 (28 U.S.C. 651) authorizes federal district courts to incorporate mediation, early neutral evaluation and mini trials as alternative resolution processes to their proceedings. Each district court must implement these programs under local rule 28 U.S.C. 651[c]. Absent implementation of an ADR program, a federal court cannot impose non-consentual mediation on the parties; In re Atlantic Pipe Corp., 304 F.3d 135 (1st Cir.2002). But the Atlantic Pipe court held that the District Court had inherent power to order non-consentual mediation-disagreeing with other Circuits.

The statute (28 U.S.C. 651) requires the court to provide a list of ADR processes to litigators in civil cases although judges may exempt specific categories (28 U.S.C. 652[b]).

A. Settlement Procedure: Court Rules  [TOC]

An experimental program originally initiated in several District Courts is now available in all courts pursuant to Rule making authority of 28 U.S.C. 2701. This statute gives District Courts flexibility in establishing rules for settlement procedures. The Central District of California has adopted Rules in the course of implementing its policy to encourage disposition of litigation: “In the Matter of Alternative Dispute Resolution (ADR) Pilot Program; General Order No. 02-07.”

Pursuant to the Court’s policy, the court may refer suitable cases to an impartial and experienced Attorney Settlement Officer (Sect. 3.1 )in specifically designated areas of law or who is familiar with the processes of alternative dispute resolution. The ADR Pilot Program mandatorily refers civil cases to participating judges if the prayer for relief is $250,000 or less, or is within  certain categories: Contract-insurance; contract-marine; contract-Miller Act; personal injury in assault, libel and slander; other personal injury or product liability: marine, motor vehicle, motor vehicle product liability, medical malpractice, product liability; civil rights-employment; Sect. 4.1. The court may also refer cases in the discretion of the judge despite not included in this list; Sect. 4.2.

Forms for participation in either program are given to the plaintiff and all parties must sign accordingly, depending on the program they intend to enter. Counsel can select their own Settlement Officer, or the court will randomly assign from the list if the parties are unable to agree; Sect. 7.1; 7.2. Under either method, the Attorney Settlement Officer must determine any conflicts as governed by the California Rules of Professional Responsibility.   Counsel can also select a private or non-profit dispute resolution service provider.

The court offers three options:

An early settlement conference;

A settlement conference conducted by a member of the Attorney Settlement Officer Panel pursuant to Local Rule 16-14;

A settlement conference conducted by a named member of the Attorney Settlement Panel;

Local Rule (L.R.) 1614.1: Subject to court approval, parties in civil litigation must participate in a mandatory Settlement Procedure;

Subject to court review, all parties must sign a "Notice of Settlement Procedures” not later than 14 days after filing a scheduling order or no later that 45 days before the Final Pretrial Conference;

L.R. 16-14.3: In the absence of filing this order the trial judge may order participation in a Settlement Procedure;

Settlement Procedure no.1: Parties may appear before the judge or magistrate;

Settlement Procedure no. 2: Parties may appear before a member of settlement panel of court appointed attorneys;

Settlement Procedure no. 3: Parties may participate in a non judicial dispute resolution proceeding;

Settlement Procedure no. 4: Subject to court approval, the parties may appear before a judge assigned to the Settlement Panel.

Settlement Procedure Requirements: In all Procedures the parties must submit a confidential statement of the case; attend the hearing with those who have settlement authority; the trial attorney must appear; parties must be prepared to discuss all economic and non economic issues relevant to settlement; L.R. 16-15.4.

Optional Requirements: opening statement; summary trial; presentation or summary of testimony; closing argument; a combination of the foregoing.

Report of Settlement: to the clerk of the trial court immediately.

Non-exclusive Rules: Judges remain free to employ appropriate settlement procedures regardless of these rules; L.R. 16.14.9.

See, Local Rules for Central District, FRCP 16 Local Rules Integrated with Titles of FRCP.

Practice Note: The Alternative Dispute Resolution Act authorizes each District Court to draft rules for its administration; 28 U.S.C. 2071(a). Rules for District Courts throughout California vary and counsel must review local Federal Rules of Court. In the Central District of California, Local Rule 16-14 Policy re Settlement describes settlement procedures and includes General Orders; Exhibit A. For a comprehensive discussion of the potential for alternative dispute resolution in Federal courts, see 76 N.Y.U. L. J. 1768 (2001); 67 St. John's L. Rev. 877 (1993).

See, Mediation, infra.

B. Court Rules: Non-Compliance  [TOC]

Failure to comply with court ordered mediation may subject counsel and client to sanctions; Nick v. Morgan's Foods, Inc., 270 F.3d 590 (8th Cir. 2001); Turner v. Young, 205 F.R.D. 592 (2002).

C. Confidentiality  [TOC]

Confidentiality of ADR proceedings is governed by 28 U.S.C. 652(d), and disclosure of confidential communications is prohibited. This statute is amplified and enforced as to "communications" during settlement proceedings; Goodyear Tire & Rubber Co. v. Childs Power Supply, Inc., 332 F.3d 976 (6th Cir. 2003).

Cross Reference: Compare the California rules applicable to confidentiality of mediation; Rojas v. Sup. Ct., 33 Cal.4th 407 (2004); Foxgate HOA, Inc. v. Bramalea Cal., Inc., 26 Cal.4th 1 (2001).

D. Disqualification of Neutral  [TOC]

Disqualification of neutrals is governed by 28 U.S.C. 653(b) on grounds set forth in 28 U.S.C. 455 (applicable to judges) and Rules of Professional Responsibility standards).

E. Early Mediation   [TOC]

Effective January 1, 2003 the Central District began offering an Early Mediation program (Alternative Dispute Resolution Pilot Program) for specific categories of contract, personal injury and employment disputes if the amount in controversy is less than $250,000.00. The Court will refer cases to members of its Settlement Panel in an attempt to achieve resolution.

Note: In some arbitration clauses, the parties are required to mediate before seeking arbitration, and, unless a party complies with the condition, the court will not entertain a petition to arbitrate; Kemiron Atlantic, Inc. v. Aguakem, Int., 290 F.3d 1287 (11th Cir. 2002).

 

PART TWO: ARBITRATION IN STATE COURT

Chapter IX. Arbitration Law in General: State Court  [TOC]

A. Commercial Arbitration Claims  [TOC]

The California Arbitration Act (CAA) provides: "A written agreement to submit to arbitration an existing controversy, or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract"; C.C.P. 1280;1281. This statutorily described agreement between the parties is characterized as "contractual arbitration," or "true" arbitration, as distinct from "judicial" arbitration as prescribed in CCP 1141.10; Mercury Ins. Group. v. Sup. Ct., 19 Cal. 4th 432 (1998); Parker v. Babcock, 37 Cal.App.4th 1682 (1997). Each of these alternatives to litigation is discussed in this Chapter.

California statutory law identifies the procedure to initiate arbitration of written agreements, limits rules of discovery, outlines the conduct of arbitration and provides for rendition of an award and subsequent confirmation by judgment; C.C.P. 1282 et seq.,

Parties can initiate arbitration either on their own initiative without court intervention by submission of a demand to arbitrate, or seek a court order compelling arbitration if the other party refuses or neglects to arbitrate. If one party has filed litigation, the other party can petition the court to order arbitration and stay litigation.

CCP 1280 is not limited to "commercial" transactions and includes appraisals, valuations and employment agreements. Other statutes apply to arbitration of specific subject matter; See, Ch. XVII-C-5; Substantive Arbitrability.

B. Federal Statutory Claims   [TOC]

Absent exclusive federal jurisdiction or preemptive federal law, parties can arbitrate civil actions filed in California courts alleging violation of federal statutory claims. California unequivocally enforces contractual clauses requiring arbitration of employment disputes (Title VII) if certain conditions are met; Armendariz v. Foundation Health Psychcare Services., Inc., 24 Cal.4th 83 (2000); California Teachers Assn. v. Sup. Ct., 20 Cal.4th 327 (1999); Lagatree v. Luce, Forward, Hamilton and Scripps, 74 Cal.App.4th 1105 (1999); 24 Hour Fitness, Inc. v. Sup. Ct., 66 Cal.App.4th 1199 (1998).

Despite an adverse grievance decision in a labor dispute, union members do not surrender their right to file federal statutory claims in a judicial forum (absent waiver) pursuant to Title VII or its California counterpoint, Marcario v. County of Orange, 155 Cal.App.4th 397 (2007);  Fair Employment & Housing Act, Gov. Code 12900; Vasquez v. Sup. Ct., 80 Cal.App.4th 430 (2000); Torrez v. Consolidated Freightways Corp., 58 Cal.App.4th 1247 (1997).

Cross Reference: Ch. IV-H-13; Administrative Conditions; E.E.O.C. v. Waffle House, Inc., 534 U.S. 279 (2002). The federal rule permitting union members to file a civil action despite an adverse grievance ruling is the same.

C. State Statutory Claims   [TOC]

California has mandated that certain categories of disputes are subject to arbitration. These statutory contractual provisions for arbitration are often combined with common law causes of action and, in some cases, supplemented by substantive and decisional law. Statutory causes of action alleging violation of its provisions involve legislative proclamations of public policy, the doctrine of federal preemption and the role of "unconscionable" terms. Each is discussed, See, Ch. XVII-C-5.

D. Categories of Arbitration  [TOC]

California law provides two kinds of arbitration: involuntary non-binding judicial arbitration as an adjunct of litigation under the Judicial Arbitration Act (CCP 1141.10 et seq.) and voluntary, binding contractual arbitration under the California Arbitration Act (CAA); CCP 1280, et seq. Each is independent of the other; Mercury Ins. Group. v. Sup. Ct., 19 Cal. 4th 432 (1998). Judicial arbitration is court ordered, permitting either party to set aside an award and request trial de novo; CCP 1141.20. Contractual arbitration initiated by the parties or court ordered imports "finality" of a dispute and limited judicial review of an award; CCP 1280, et seq.

Distinctions between these two processes are discussed in Mercury Ins. Group v. Sup. Ct.; Trabuco Highlands Community Assn. v. Head, 96 Cal. App.4th 1183 (2002); Parker v. Babcock, 37 Cal.App.4th 1682 (1997). In Winograd v. American Broadcasting Co., 68 Cal.App.4th 624 (1999) the appellate court struggled to interpret an equivocal document authored by counsl consisting of multiple interpretations referencing judicial or contractual arbitration.

Counsel also need to draw distinctions between arbitration and the following categories of alternative dispute resolution (ADR); Referees (CCP 638); Article VI Judges (Temporary Judge); Estate of Fain, 76 Cal.App.4th 837 (1999); Old Republic Ins. Co. v. St. Paul Fire & Marine Ins. Co., 45 Cal.App.4th 631 (1996); mediation-voluntary or court ordered (CCP 1775).

See, Referees, Ch. XXII ; Temporary Judges, Ch. XXIII.

E. Court Annexed Arbitration (Judicially Ordered)   [TOC]

The California Legislature, originally concluding that increased cost of litigation and inefficient resolution of small civil claims disputes inhibits prompt resolution, enacted a series of statutes to encourage "judicial arbitration" by mandating informal arbitration conducted in a simplified and economical procedure; (CCP 1141.10 et seq.). Depending on the local jurisdiction, the rules may vary but the award is non-binding, lacks finality and any party may request a trial de novo; CCP 1141.20.

Note: Applicable California Rules of Court in judicial arbitration are discussed; See, Ch. X- D.

Because a party can file a trial de novo, counsel are reluctant to participate for a variety of reasons. But non-participation by counsel is perilous. Willful and inexcused non-participation can result in sanctions; Reitveld v. Rosebud Storage Partners LP, 121 Cal.App.4th 250 (2004).

F. Labor Arbitration  [TOC]

1. Federal Preemption  [TOC]

Although California law permits arbitration of labor disputes (CCP 1280[a]), the federal Labor Management Relations Act, 29 U.S.C. 185, preempts state law claims "substantially dependent" on terms of a collective bargaining agreement (CBA), or "inextricably intertwined" with the agreement; Cramer v. Consolidated Freightways, Inc., 255 F.3d 683 (9th Cir. 2001); Oberkramer v. IBEW-NECA Serv. Ctr., Inc., 151 F.3d 752 (8th Cir. 1998); Cal. Lab. Code 1126.

Arbitration provisions in a labor contract are generally resolved under federal law; Cal. State Council of Carpenters v. Sup. Ct., 11 Cal.App.3d 144 (1970). When tort claims are involved, the California courts apply the federal rule to determine whether the claims are "inextricably intertwined" in the CBA; Ruiz v. Sysco Food Services, 122 Cal.App.4th 520 (2004); or if the plaintiff raises FEHA (Gov. Code 12900) claims of employment discrimination; Deschene v. Pinole Point Steel Co., 76 Cal.App.4th 33 (1989).

Labor Code 98.6 providing "victim specific" remedies (reinstatement of lost wages and benefits) is pre empted by th FAA if the employee is subject to an arbitration clause with the employer. Nor can a state act on an employee's behalf as authorized by statute; Ralph’s Grocery Co. v. Massie, 116 Cal.App.4th 1031 (2004) [depublished]. The Ralph’s court excluded proceedings under FEHA from their decision.

Cross Reference: Labor Law in Part I, Ch. II, A-3. Government employees covered by a CBA are excluded from coverage by the LMRA; 29 U.S.C. 651; S.E.I.U. v. Cupertino School Dist., 131 Cal.App.4th 985 (2005) [depublished].

2. Labor Law  [TOC]

Arbitration pursuant to the CAA includes written agreements between employers and employees or between their respective representatives; CCP 1280(a). Although analysis of labor arbitration case law roughly parallels decisional contractual arbitration, interpretation of CBA language includes deference to California arbitration policy. Review may include extrinsic evidence of past practices between both parties; Hartwell Comm. Coll. Dist. v. Sup. Ct., 124 Cal.App.4th 1443 (2004).

A collective bargaining agreement (CBA) negotiated between an employer and a labor union is neither an ordinary contract nor covered by common law concepts that control private agreements; John Wiley & Sons v. Livingston, 376 U.S. 543 (1964). Amalgamated T.U. v. LAMTA, 107 Cal.App.4th 673 (2004) discusses the role of arbitration and the arbitrator in CBA disputes. The language of a memorandum of understanding (MOU) is important and in order to qualify as an "arbitration" must include the core concept of "finality"; Am. Fed of St., Co. and Municipal Employees v. MWD, 126 Cal.App.4th 247 (2005).

Labor Code 218.5 (recover unpaid wages): an arbitration is the functional equivalent of an "action" in some contexts [punitive damages]; Baker v. Sadick, 162 Cal.App.3d 618 (1984); CCP 22.

3. Administrative Preemption  [TOC]

Under federal law, the E.E.O.C. is a federal administrative agency responsible for enforcing federal labor claims involving alleged discrimination on grounds of gender, race, disability and age (E.E.O.C. v. Waffle House, Inc., 534 U.S. 279 [2002]) and, under some circumstances, may preempt California law. In California, the state equivalent is FEHA (Fair Employment Housing Act; Bus. & Pro.12900) and this statute essentially tracks the E.E.O.C., requiring claims to be filed administratively prior to initiating litigation; Ralph's (depublished) supra.

 In some cases the FAA preempts administrative regulations which displace an arbitrable forum for dispute resolution; Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 ( 2002). Under  California law, the employee cannot invoke the so called Berman waiver providing for administrative resolution of labor claims in lieu of an arbitral forum; Sonic-Calabasas A, Inc. v. Moreno, 174 kCal.App.4the 546 (2009).

   G.  International Arbitration   [TOC]

The statutory framework for international arbitration in State courts is outlined in CCP 1297.11 et seq. International arbitration is governed essentially by federal law and the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and implemented by 9. U.S.C. 201-208. Absent a removal petition to federal court, a state court can exercise jurisdiction; Gueyffier v. Ann Summers, Ltd., 144 Cal.App.4th 166 (2006).  The FAA does not preempt California law on vacating awards for arbitration conducted in state court; Gueyffier.
Note: Gueyffier was reversed by the California Supreme Court on different grounds but this case is included to provide basic research on international arbitration.

 

H. Workers Compensation Arbitration   [TOC]

California has enacted the Workers Compensation Act (Lab. Code) 3200 et seq. to resolve injury related issues in employment but in some cases an employee can petition the court to compel arbitration for relief outside the scope of the CBA; Amalgamated T.U. v. LAMTA, 107 Cal.App.4th 673 (2004).

1. Jurisdiction  [TOC]

Costa v. WCAB, 65 Cal.App.4th 1177 (1998) held that arbitration of workers compensation claims pursuant to a negotiated contract between employer and union do not violate Lab. Code 3201.5 et seq. (a comprehensive series of statutes governing workers compensation claims). Although the Costa court decided this case on jurisdictional grounds, i.e., the Workers Compensation Board does not have exclusive jurisdiction, the case is included here as an example of arbitration in a non-litigation context.

2. Costs  [TOC]

The California Supreme Court has held that Lab. Code 3856 (allocation of costs between opposing parties) is inapplicable to judicial arbitration; CCP 1141.21. Instead, Lab. Code 3856 governs distribution of proceeds of a judgment between an employer and employee; Phelps v. Stostad, 16 Cal.4th 23 (1997).

See, Ch. X; Court Annexed Arbitratio

.I. California Rules of Court (CRC)  [TOC]

CRC 3.810 et seq. implements judicial arbitration and does not apply to contractual arbitration pursuant to the CAA; CCP 1280 et seq. See, Court Annexed Arbitration.

J. Local Court Rules  [TOC]

Los Angeles Superior Court Rules for ADR are outlined in Rule 12, et seq. The Rules are applicable to judicial arbitration, not contractual arbitration under CCP 1280, et seq.

K. Arbitration Service Provider Rules  [TOC]

Arbitration service providers have drafted rules to process arbitration hearings. Although tracking the CCP in many respects, departures from statutory provisions and policy statements may vary, or are more comprehensively stated, in resolution of specific disputes (employment; consumer; class actions). Copies of JAMS (JAMSADR.com) and AAA.org. Rules are available on the Internet. In some instances, courts have referred to these Rules, particularly for purposes of disqualifying arbitrators; Broughton v. Cigna Health Plans of Ca., 12 Cal.4th 315 (1996). See, Ch. XIX; Disqualification & Disclosure.

Note: Arbitrator service provider rules are incorporated into the arbitration and must be considered in administering the arbitration process.

See, also Trade & Industry Rules, Part I, Ch. I-N (Federal Court); this chapter, Section P.

L. Mediation/Arbitration  [TOC]

In some cases, the parties contract to mediate a dispute as a condition precedent to arbitration. Or, the parties can agree to this procedure, characterized as "med/arb".

See, Court Annexed Mediation, Ch. XI.

M.  Umpires  [TOC]

Insurance Code 2071 (amended in 2002 to change the selection of umpires for insurance policies issued after 2002) provides for umpires in resolving insurance disputes. The courts require legally "disinterested" umpires; Louise Gardens of Encino HOA, Inc. v. Truck Ins. Exchange, 82 Cal.App.4th 648 (2000); Michael v. Aetna Life, & Casualty Ins. Co., 88 Cal.App. 4th 925 (2001); Gebers v. St. Farm Gen. Ins. Co, 38 Cal.App.4th 1648 (1995). Umpires are included within the scope of the California Arbitration Act; CCP 1280 (a).

N. Appraisals   [TOC]

Appraisals are also included as “agreements” subject to arbitration in the California Arbitration Act; CCP 1280 (a); Kacha v. Allstate Ins. Co., 140 Cal.App.4th 1023 (2006); Lambert v. Carneghi, 158 Cal.App.4th 1120 (2008) [insurance policy]. An appraisal award in an insurance policy is treated as an arbitration award, confirmed as a judgment (CCP 11286 and entered under CCP 1287.4; Devonwood Condominium Owners Assn. v. Farmers Ins Exchange, 162 Cal. App.4th1498 (2008).      

Attaching a label, i.e., "binding valuation", to a document does not necessarily qualify as an arbitration. The agreement must conform to the generally accepted meaning of an "arbitration." Once an agreement qualifies as an "arbitration" all the substantive and procedural law of arbitration applies; AFSCME v. MWD, 126 Cal.App.4th 247 (2005); Coopers & Lybrand v. Sup.Ct., 212 Cal.App.3d 524 (1989). Bank of Orange v. Azar, 2007 WL 521893 [Cal.App.Non.Cite]: distinguishing “settlement agreement” from “arbitration.”

See: Arbitration Defined, Chapter XIV-B.

Standard fire insurance policy appraisal language is equivalent to an arbitration clause; Coopers & Lybrand; Ins. Code 2071; Rubin v. Western Mutual Ins. Co., 71 Cal.App.4th 1539 (1999). Appraisers are held to the same standards as umpires; Michael v. Aetna Life & Casualty Ins. Co., 88 Cal.App.4th 925 (2001); Appalachian Ins. Co. v . Rivcom Corp., 130 Cal.App.3d 818 (1982). In Mahnke v. Sup. Ct. (California Fair Plan Association), 189 Cal.App.4th 565 (2009)   the court held that legislative amendment to Ins. Code 2071 rejected the Michael case, and appraisers are not subject to an automatic and unlimited right to disqualification. CCP 1281. 9 and 1289.91 do not apply  to appraisers.  The court also held that party selected appraisers  are still subject to general disclosure requirements under the “general impression of bias” standard (citing cases).

Appraisal proceedings are limited to the issues and their scope to which the parties have agreed; Ericksen, Arbuthnot, McCarthy, Kearney & Walsh v. 100 Oak St., 35 Cal 3d. 312 (1983); Daimler Chrysler Services, N.A., Inc. v. Zurich American Ins. Co., [Cal.App.  [Non.Cite.]. The appraisal is subject to statutory contractual law; Louise Gardens of Encino HOA, Inc.v. Truck Ins. Exchange, Inc., 82 Cal.App.4th 648 (2000).

Practice: Confirmation of an appraisal award into a judgment is not an appealable judgment applicable to other causes of action remaining to be tried; Rubin v. Western Mutual Ins. Co., 71  Cal.App.4th 1539 (1999).

O. Self Regulating Organizations (SRO)  [TOC]

Various trades and professions arbitrate disputes among its employees, members, or between members and the general public. The most common are arbitrations conducted by the NASD and NYSE, now re-named “Financial Industry Regulatory Authority” formed under the consolidation of both groups. Both groups operate under Rules approved by the SEC (Rules 12000 for customer dipsutes and 13000 for industry disputes.  In Brown v. Wells Fargo Bank, N.A., 168 Cal.App.4th 938 (2008) the court held the industry Rules were not substantively unconscionable.

Anyone required to hold a license from NASD must complete and sign a Form U-4 agreeing to arbitrate disputes. Arbitration is conducted under NASD Rules roughly comparable to commercial arbitration; Clark v. First Union Securities, Inc., 153 Cal.App.4th 1595 (2007).
 The NASD Rules exclude class actions from arbitration unless the parties agree otherwise; Clark  [good case for reviewing NASD arbitration rules in state court].

Bus. & Prof. 7085 provides an arbitrable forum for contractor disputes; State Licensing Bd. Arbitration Program; Public Construction contracts, see, XVII-C-5-t.

The Screen Actors Guild maintains a CBA with the Assn. of Talent Agents to arbitrate disputes among their members; Matthau v. Sup.Ct., 151 Cal.App.4th 593 (2007); Rule 16(g).

Cross Reference:  Ch. I-N: Trade or Industry Arbitration

P. Securities Transactions  [TOC]

Securities transactions in interstate commerce are governed by the FAA; Strotz v. Dean Witter Reynolds, Inc., 223 Cal.App. 2d. 208 (1990); NASD Rules, NASD Code of Arbitration Procedure, Rule 10201.

Q. Patents   [TOC]

Although 28 U.S.C. 1338 (a) imposes exclusive jurisdiction on federal courts, state courts retain jurisdiction of contractual disputes between parties; Hunter, et al. v. Harmonic Design, Inc., 153 F.3d 1318 (Fed. Cir.1961); Rogers v. Hensley, 198 Cal.App.2d 486 (1961); Tender Living Things, 2005 WL 902648 [enforcing a written agreement]; (Cal.App.) [Non.Cite.].

R. Attorney-Client Disputes  [TOC]

Rapid expansion of arbitration . . . "has engendered a proliferation of arbitration clauses in attorney retainer agreements"; Corell v. The Law Firm of Fox & Fox, 129 Cal.App.4th 531 (2005). These agreements distinguish between services performed and fee disputes.

Bus. & Prof. 6200 and 6204 et seq. (Mandatory Fee Arbitration Act; MFAA) establish a procedure for arbitrating attorney fee disputes. Non binding arbitration is mandatory for attorneys if selected by clients; Bus. P 6200 (c). Fee arbitration may occur either before an attorney files a Complaint seeking recovery of fees or after an action has been initiated but before the client files an answer; Bus. & Prof. 6201 (b). Either party may file for trial de novo (TDN) 30 days after service of an award in a non binding arbitration; Bus. & Prof. 6204(b). If no party files a TDN the award is final; Bus. & Prof. 6200 (b). Failure to comply with the 30 day time limit in the statute is not grounds for relief under CCP 473 (inadvertence or excusable neglect); Maynard v. Brandon, 36 Cal.4th 364 (2005); Pressler v. Donald L. Bren Co., 32 Cal.3d 381 (1982).

The parties may agree in writing to binding arbitration at any time after a fee or cost dispute arises; Bus & Prof. 6204 (a).  If there is no action pending, a party may file a civil action; Bus & Prof. 6204 (c); if an action is pending after arbitration, a party files a rejection of the award and requests trial in the pending action; Bus. & Prof. 6204 (b). Determination of the prevailing party and the consequences is recited in Bus. & Prof. 6204 (d).

The leading cases discussing attorney-client fee disputes are Schatz v. Allen Matkins Leck Gamble & Mallory, LLP , 45 Cal.4th 557 (2009) and Aguilar v. Lerner, 32 Cal.4th 974 (2004); [Alternative Systems, Inc. v. Carey, 67 Cal.App.4th 1034 (1998). Bus. & Prof. 6204 (a) is no longer good law.]  Schatz does not prohibit attorneys from participating in binding arbitration with the client if the parties signed an agreeement to binding arbitration in writing and only after the fee dispute has arisen; Bus. & Prof. 6200(c) and a party is dissatisfied with the result. The contract for binding arbitraion trumps the trial de novo provision of the MFAA.

Evidence of a binding arbitration award conducted under the aegis of this statute is inadmissible and does not invoke collateral estoppel or res judicata in a subsequent proceeding; Liska v. Arns Law Firm, 117 Cal.App.4th 275 (2004); CCP 6204 (e).

Arbitration of attorney client disputes under MFAA is limited to legal fees, costs or both (Bus. & Prof. 6200 [a]) and inapplicable to clams for affirmative relief against an attorney for damages, malpractice or violation of rules of professional conduct. To insure client awareness of arbitration, the attorney must give written notice of the right to arbitration at or before the attorney brings suit or other provisions to collect unpaid fees and costs; Bus. & Prof. 6201(a).  A client who fails to request arbitration within 30 days of notice of the right to arbitrate waives that right  and a pre dispute retainer agreement for binding arbitration (othewise unenfoceable) is enforceable; Aguilar; Ervin, Cohen, Jessup, LLP  v. Kassel, 147 Cal.App.4th 821 (2007).

If the client elects to arbitrate but does not invoke the right to do so, waives the right and any pre existing arbitration clause is enforceable; Aguilar.

Failure to give notice is a ground for dismissal of the action or proceeding and the client may stay any action brought by the attorney; Bus. & Prof. 6201 (b). Non- compliance, and issuance of a subsequent order for dismissal, is discretionary with the court; Law Offices of Dixon R. Howell v. Valley, 129 Cal.App.4th 1076 (2005).

Attorney fee disputes with a client can confer jurisdiction on an arbitrator; Glassman v. McNabb, 112 Cal.App.4th 1593 (2003); Bus. & Prof. 6200.

In Corell v. The Law Firm of Fox & Fox, 129 Cal.App.th 531 (2005), counsel sought a TDN after arbitration of a fee dispute, then filed a fee action which he subsequently dismissed. The Corell court applied the rule in Herbert Hawkins Realtors, Inc. v. Milheiser, 140 Cal.App.3d (1983) [in court ordered arbitration].  Plaintiff requested TDN and then purported to dismiss the action. The court characterized this conduct as a repudiation of the TDN and finalized the award.

Practice: Resolution of attorney client fee disputes are managed by local and State Bar Associations; Bus. & Prof. 6200 et seq.

Attorney fees in insurance cases involving appointment of independent counsel attributable to a conflict of interest (Cumis) between insured and insurer are statutorily arbitrable in the absence of policy provisions to the contrary: CCP 2860 (c); Compulink Mgmt. Ctr.v. St. Paul Fire and Marine Ins. Co., 169 Cal.App.4th 289 (2008);  San Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal. App.3d 358 (1985).

S. Attorney Authority  [TOC]

Blanton v. Womancare, 38 Cal.3d 396 (1985) is the leading case on the authority of a lawyer to waive jury and stipulate to arbitration (in this case judicial arbitration) but the rules are the same for contractual arbitration. The rules are not "bright lines" and a reading of Blanton does not so state. In Norcal v. Mutual Ins. Co.v. Norton, 84 Cal.App.4th 64 (2000) the client argued she had not approved arbitration but counsel produced a letter to the opposing party copying the client, she did not deny unawareness of the letter and did nothing to disavow the content.  Failure to take action constitutes  a ratification; confirmed in Hirscher v. Dept. of Corrections,  2008 WL 2917598 (Cal.App.) [Non.Cite].

A party may raise the issue of his or her lack of consent to the attorney's action at various stages of the proceedings. For example, the issue was raised by the plaintiff in Blanton prior to arbitration in a motion to invalidate the stipulation and by the defendant after arbitration in a motion to set aside the arbitration award; Sanker v. Brown, 167 Cal.App.3d  1144 (2008). In Lazarus v. Titmus 64 Cal.App.4th 1242 (1991), it was raised as a response to a motion to compel arbitration.  In CPI Builders, Inc. v. Impco Tech. Inc., 94 Cal.App.4th 1167 (2001)   the client moved for reconsideration of a court order for binding arbitration; this court found the client's withdrawal of consent was not communicated to the other party prior to the other party's acceptance of the offer to arbitrate. In Toal v. Tardiff, 178 Cal.App.4th (2009)  the court held that in response to a motion to confirm  an award a party can challenge the existence of an agreement to arabitrate.

Practice: The easiest way to avoid a complaint by a client challenging attorney authority is to execute a stipulation is to include explanation of arbitration to a client, its binding result and narrow grounds for appeal. The arbitrator can also explain the "finality" of arbitration.

T. Malicious Prosecution  [TOC]

Malicious prosecution of contractual arbitration is not a viable cause of action. "Termination of litigation" required in a civil action for malicious prosecution is not the "sort of favorable termination" needed to support malicious prosecution action subsequent to an award. The parties seek "finality" in arbitration, not continued litigation; Brennan v. Tremco, Inc., 25 Cal.4th 310 (2001). The rule prohibiting malicious prosecution is also applicable to judicial arbitration; Brennan.

            U.  Anti-Slapp Motions

California has enacted a unique statute with the acronym anti-SLAPP (strategic lawsuit against public participation); CCP 425.16.  This statute is inapplicable to arbitration; Century 21 Chamberlain & Assocs. v. Haberman, 173 Cal.App.4th 1 (2009); See, also, Manhattan Loft, Inc. v. Mercury Liquors, Inc., 173 Cal.App.4th 1040 (2009).

 Chapter X. Court Annexed Arbitration (Judicial): State Court  [TOC]

A. General Rules  [TOC]

The California Legislature by statute, and the Judicial Council by Rule, (California Rules of Court; CRC) have embraced the role of alternative dispute resolution (ADR) and incrementally seek to bring its practice, rules and procedures under the umbrella and supervision of the courts; CCP 1141.14. CRC 3.221 mandates the court to provide the plaintiff with an informational package to include explanation of ADR programs and arbitration service providers or list of neutrals available to the parties; CRC 10.781.

Court appointed neutrals must comply with all ethics requirements and Rules of Court; CRC 10.781.  Plaintiff must serve this package on each defendant at the time of service of process. Cross complainants must also comply with CRC 3.221 on newly served parties. Under court unification, this rule applies to all civil courts.

Rule 212 describes the case management process mandated in every general civil case (with limited exceptions) in courts participating in the judicial (court annexed) arbitration program (CCP 1141.11). The court must determine if a case is suitable for judicial arbitration; CRC 3.720-30. Each party must meet and confer 30 days prior to the date set for the case management conference; CRC 3.724.

Note: In 2007, all CRC rule numbers have changed.  CRC Rules are published on the Internet.

B. Judicially Ordered Arbitration  [TOC]

"Judicial" arbitration is a misnomer, as it is neither judicial (no judicial intervention in the process) nor arbitration (not binding); Vandenberg v. Sup.Ct., 21 Cal.4th 815 (1999); In re Marriage of Assemi, 7 Cal.4th 896 (1994). The court imposes judicial arbitration as a matter of law (CCP 1141.11) after a party files a case, as distinct from private consentual arbitration in which parties can agree in advance to resolve disputes without resorting to litigation or agree on a resolution format after a dispute emerges. Judicial arbitration is an adjunct to litigation. Although mandatory in certain cases, it occurs only when an action has been filed; Blanton v. Womancare, Inc., 38 Cal.3d 396 (1985). The Legislature authorizes a party dissatisfied with an award in judicially ordered arbitration to seek a judicial forum by filing a request for trial de novo (TDN); Blanton.

C. Exemptions To Judicial Arbitration:)[TOC]

The following categories are exempt from judicial arbitration: CRC 3.811 (b)

1. Equitable Relief (unless frivolous or insubstantial)  [TOC]

2. Class Actions   [TOC]

3. Small Claims (or trial de novo from small claims appeals)   [TOC]

4. Unlawful Detainer  [TOC]

5. Family Law   [TOC]
Family Law Section 2554  allows the court to order judiil arbitration if the parties cannot agree on division of community property and the community estate does not exceed $50,000.

6. Local Rules  [TOC]
Actions otherwise amenable to arbitration but by local rule or judicial finding are unable to achieve the benefits of arbitration.

7. Monetary Limit  [TOC]
Multiple causes of action or cross complaint, either one exceeding $50,000.

D. Rules of Practice  [TOC]

1. Judicial Council Rules   [TOC]

The Judicial Council provides rules for practice and procedure of all cases submitted to judicial arbitration; CCP 1141.10; CRC 3.800 et seq. CRC 3.822  and 3.823 apply to discovery and evidence. Rule 3.816 (a), (b) & (c) prescribe the arbitrator's duty to disqualify and make disclosures. Rule 3.823 describes the rules of evidence at the hearing and admits considerable evidence on motor vehicle collisions, otherwise inadmissible under the Evidence Code. CRC 3.824 outlines the powers of an arbitrator. CRC apply in any case ordered into arbitration (or by stipulation of the parties).

Practice: CRC 3.800 et seq. outlines the administrative process and other details of this form of ADR and should be consulted if the court orders arbitration, including the time limit for file a TDN after issuance of an award.

2. Local Rules   [TOC]

Each county may require compliance with Local Court Rules that do not conflict with Judicial Council Rules. Sanctions for non-compliance with Rules are authorized by CCP 575.2 include: striking the pleadings; dismissal; payment of arbitration fees; payment of attorney fees and costs; Rietveld v. Rosebud Storage Partners, 121 Cal.App.4th 250 (2004).

See, Sanctions, this Ch. X.

E. Civil Cases: Superior Court with 18 or more Judges   [TOC]

The California Legislature has mandated diversion to arbitration of all unlimited civil cases (CCP 85) filed in these courts if the amount in controversy does not exceed $50,000.00 for each plaintiff; CCP 1141.11 (a); CRC 3.811. The court is empowered to order arbitration without consent of the parties although either party may vacate any subsequent award by filing a request for TDN; Blanton v. Womancare, Inc., 38 Cal.4th 398 (1985); Mercury Ins. Group. v. Sup. Ct., 19 Cal. 4th 432 (1998).

F. Civil Cases: Superior Courts with Fewer than 18 Judges   [TOC]

In Superior Courts with less than 18 judges, all unlimited civil cases not in excess of $50,000.00 may be ordered to arbitration by local rule; CCP 1141.11(b); CRC 3.811.

Note: Under either of these Sections, the parties can stipulate (CRC 3.812 or elect (all plaintiffs) judicial arbitration regardless of the amount in controversy; CCP 1141.12. Stipulations (or elections) must be filed no later than the filing of the initial case management statement (CRC 3.812 (d) unless a cross complainant files an objection and the court determines the amount in controversy relating to the cross complaint exceeds $50,000.00; CRC 3.812 (c).

G. Limited Civil Cases  [TOC]

The Legislature having abolished the distinction between Superior and Municipal Courts (CCP 85), CCP 1141.11 (c) is applicable to Limited Civil Cases and all courts can submit this category to judicial arbitration. In determining whether to reclassify an action to a Limited Civil Case after a TDN, only the arbitration award may be considered; Stern v. Sup. Ct., 105 Cal.App. 4th 223 (2003).

Comment: For a case discussing the difference between "Limited" and "Unlimited" civil cases, and a motion to classify from one category to another; See, Ytuarte v. Sup. Ct.,129 Cal.App.4th 266 (2005).

H. Motor Vehicle Cases   [TOC]

In Limited Civil Cases, each Superior Court which has adopted judicial arbitration may refer motor vehicle collisions involving a single defendant to arbitration; CCP 1141.11(d).

I. Status Conference  [TOC]

The court holds a status conference in civil actions no later than three months after the at-issue memorandum is filed or no later than 90 days prior to trial, whichever comes first; CCP 1141.16. No court can dispense with the conference. See also, Los Angeles Sup. Ct. Rule 12. Parties who stipulate to arbitration must do so no later than the time the case management statement is filed; CRC 3.812.

J. Amount in Controversy  [TOC]

The court-not the parties-determines the "amount in controversy" based on the total amount of damages sought at a status conference; CCP 1141.16. If the parties stipulate the amount exceeds that identified in CCP 1141.11(a) and 1141.16 (b), the court may order arbitration; CCP 1141.12(i)(ii). In either case, the court reference to arbitration is without prejudice to any finding by an arbitrator or court in a TDN; CCP 1141.16 (b); Sharples v. Cole, 29 Cal.App.4th 1213 (1994).

Nothing in the Judicial Arbitration Act prohibits an arbitration award in excess of the amount in controversy as specified in CCP 1141.21 ($50,000.00).

A decision to refer the case to judicial arbitration is not appealable; CCP 1141.11(a); CCP 1141 (b).

K. Equitable Relief  [TOC]

Prayers for equitable relief are not amenable to judicial arbitration. If the court finds applications for equitable relief frivolous or insubstantial, the court may order arbitration (a non-appealable order); Katz v. State Farm, 24 Cal.4th 871 (2001); CCP 1141.13; 1141.16 (unless the amount in controversy exceeds $50,000).

The court exercises judicial discretion to determine "frivolous or insubstantial" claims at the time of reference to arbitration, not in hindsight of trial; Sharples v. Chole, 29 Cal.App.4th 1213 (1994).

CCP 1141.21, authorizing payment of costs and fees to a party who elects a TDN and receives less in litigation than the amount of the judicial arbitration award, is inapplicable to causes of action for equitable relief; Austin v. Wiskel, 2005 WL 2885725 (Cal.App.) [Non.Cite.].

L. Discovery Prior to Arbitration  [TOC]

Parties are entitled to full discovery pursuant to the Discovery Act. All discovery must be completed no later than 15 days prior to the arbitration hearing; CRC 3.822.

M. Rules of Evidence  [TOC]

CRC 3.823: Rules of evidence governing civil actions apply but parties may submit written reports, written statements of witnesses and depositions without requiring a foundation of an "unavailable" witness. Subpoena requirements are modified.

N. Punitive Damages  [TOC]

No party may request production of evidence of punitive damages (CC 3295) unless approved by the court; CCP 1141.19.5.

O. Powers of Arbitrator [TOC]

The Legislature has assigned the responsibility of defining the powers of an arbitrator to the Judicial Council; CCP 1141.19; CRC 3.824. The list of powers includes: use of deposition testimony; introduction of evidence and ruling on its relevance and admissibility; decide the case on law and facts; issue an award; to award costs; to examine objects or sites relevant to the case. The arbitrator is not required to "make a record of the proceedings"; CRC 3.824 (a).

CRC 3.825 requires a written award signed by the arbitrator filed with the clerk. The award must determine damages and any appropriate costs but no findings of fact or conclusions of law are required. The award must be filed with the clerk within 10 days of submission; CRC 3.825 (b).

Maxwell v. Fleharty, 2005 WL 419345 (Cal.App.) [Non. Cite.] illustrates the authority of an arbitrator to implement an award. The non-prevailing party in the arbitration refused to execute escrow documents and complete the disputed transaction, but the arbitrator included a direction in the award that, in the absence of necessary signatures, the clerk of the court could execute the documents upon request of the prevailing party.

P. Trial de Novo (TDN)  [TOC]

Any case ordered into judicial arbitration will lack the finality of binding arbitration or litigation but becomes final unless any party moves for TDN within 30 days after the arbitrator files the award with the court; CCP 1141.20; CRC 3.826(a). The time is not extended, and, absent any request for a TDN, the award is converted into a judgment; CRC 3.827 (a). The arbitrator must serve the award within 10 days after completion of the hearing, accompanied by a proof of service filed in the Clerk's office (CCP 1141.8) but delay in filing the award is not jurisdictional; Lopes v. Wilsap, 6 Cal.App.4th 1679 (1992). CRC 3.825 and the motion to vacate transferred to CRC 3.828].

Effective service is jurisdictional for filing trial de novo; Domingo v. Los Angeles Co., 74 Cal.App. 4th 550 (1999).

Pursuant to CCP 1141.20 and California Rules of Court (CRC) 3.826 (c ) the arbitral result is a nullity upon filing a TDN even if only one of multiple parties requests it; Lewco Iron Metals, Inc. v. Sup. Ct., 76 Cal.App.4th 837 (1999); Quan v. Truck Ins. Exchange, 67 Cal.App.4th 583 (1998). Cross claims are also vacated; Southern Pacific Transportation Co. v. Mendez Trucking, Inc., 66 Cal.App.4th 691(1998); CRC 3.826 (b) (c).

Q. Costs & Fees After Trial de Novo (TDN)  [TOC]

If the party requesting TDN does not obtain a more favorable judgment in the amount of damages or type of relief granted at trial than awarded in arbitration, the court may award costs and fees to the other party unless the court finds financial or economic hardship to the non-prevaling party; CCP 1141.21; CRC 3.826 (d); Calderon v. Kane, 36 Cal.App.4th 1663 (1995). Pursuant to CCP 1141.21, these costs include:

1. To the county, all compensation paid to arbitrators; to the other party or parties; costs pursuant to CCP 103.5 (prevailing party);

2. Costs of the other party's expert witnesses (Boyd v. Oscar Fisher Co., 210 Cal.App.3d 368 [1989]) incurred from the time of election of TDN; Pasternak v. Karah, 2005 WL 1941385 (Cal.App.) [Non.Cite.]; CCP 1141.21;

3. To the other party: compensation paid by the party incurred from the time of election of TDN (other than the arbitrator);

4. Allowable costs include those authorized by statute, contractual terms or according to law; CCP 1033.5.

Practice: In submitting a cost bill, counsel must list only those costs incurred from the date of the election of TDN. The declaration of costs must specify when the items were incurred; Pasternak.

Provision is also made for parties who appear in forma pauperis.

In addition, the party electing TDN collects none of their costs; CCP 1141.21. This section deters frivolous applications for TDNs; Bhullar v. Tayyab, 46 Cal.App.4th 582 (1996).

Compare: Workers Compensation Claims: A collateral Workers Compensation claim trumps CCP 1141.2 and the court should allocate costs after a TDN under the Workers Compensation statutes (Labor Code 3856) rather than the formula in judicial arbitration; Phelps v. Stostad, 16 Cal.4th 23 (1997).

R. Discovery After Trial de Novo (TDN)  [TOC]

After issuance of an award and request for TDN, no discovery is permitted except under CCP 2034 ( expert witnesses) unless the moving party can establish "good cause;" CCP 1141.24; Mercury Ins. Grp. v. Sup. Ct., 19 Cal.4th 332 (1998).

Regan v. Lanet, 197 Cal.App.3d 353 (1987) lists several factors the court may consider in determining "good cause":

1. Necessity and reasons for discovery;

2. Diligence of the party seeking discovery;

3. Whether delay in the trial of the action will result;

4. Whether purposes of arbitration are being served, i.e., prompt, efficient, and

equitable resolution of claims;

5. Whether party seeking discovery is also party seeking a TDN;

6. Prejudice and hardship to both parties; McCormick v. Sentinel Life Ins. Co.,                                          153 Cal.App.3d 1030 (1984).

S. Evidence-Reference in Subsequent Trial  [TOC]

Any reference to the arbitration proceedings or award in a subsequent trial is grounds for a new trial; CCP 1141.25 (referencing CCP 657); CRC 3.826 (c ). See, Paiva v. Nichols, 2008 WL 5000484 (Cal.App.).

T. Voluntary Dismissal  [TOC]

A losing party who files a request for TDN and subsequently withdraws it cannot invoke the voluntary dismissal statute to avoid the arbitration award, and may be subject to an attorney fee award not otherwise available in a court or jury trial; Kelley v. Bredelis, 45 Cal.App.4th 1819 (1996). By dismissing the underlying action, the party repudiates its request for a TDN and the award is reinstated; Calderone v. Kane, 36 Cal.App.4th 1663 (1995). The prevailing party may move to vacate the dismissal and reinstate the award; Herbert Hawkins Realtors v. Milheiser, 140 Cal.App.3d 334 (1983).

Practice : Moving to vacate the dismissal and reinstate the award allows the court to issue an order and bring finality to the case. A comparable rule exists in Mandatory Fee Arbitration Awards (MFAA) cases; Corell v. Law Firm of Fox and Fox, 129 Cal.App.4th 31 (2005).

U. Finality of Award  [TOC]

Absent a request for TDN 30 days after the arbitrator files the award (in writing), the award is final (CCP 1141.20) and the clerk enters judgment for the prevailing party; CCP 1141.23; CRC 3.827 (a). Notice of entry of judgment is sent by the Clerk; CCP 664. 5 (b)(1); CRC 3.827 (b). The 30 day period to vacate an award is mandatory although not expressly provided for in CCP 473 relief; Maynard v. Brandon, 36 Cal.4th 364 (2005).

The judgment entered after an award in judicial arbitration is not appealable and a party can only challenge the judgment by filing a motion to vacate pursuant to CCP 473, i.e., relief for mistake, inadvertence, surprise or excusable neglect; CCP 1141.23 (b); CRC 3.828 [denied in Ayala v. Southeast Leasing & Rental, Inc., 7 Cal.App.4th 40(1992)]; Taylor v. Sharma, 2005 WL 407857; (Cal.App.) [Non.Cite.].

Practice: CCP 473 (b) allows discretionary judicial relief from a judgment, dismissal, order … on grounds of mistake, inadvertence, surprise or excusable neglect “upon any terms as may be just.” The statute also mandates timely relief (six months) upon the same grounds to vacate any resulting default entered by the clerk. . . resulting in a default judgment or resulting default judgment not  in fact caused by mistake, etc. The denial of a motion to set aside to set aside a judgment following adjudication on the merits by the arbitrator in not analogous to a default judgment and CCP 473 is not applicable; Euro Stars Sales &  Disimantling v. Bourkov, 2007 WL 2800110 (Cal.App. Non.Cite).

CRC 3.828  requires 473 relief “only upon clear and convincing evidence the grounds [as affirmed in an affidavit] are true and the motion was made as  soon as practicable after the moving party learned of the existence of those grounds.”

A party can also allege the arbitrator was subject to disqualification (CRC 3.828 (a); or invoke CCP 1286.2 (a) (b) (c) post-award petition alleging corruption in the award or corruption of the arbitrator; CRC 3.828 (a) upon notice; CCP 1141.22; Yeap v. Leake, 60 Cal.App.4th 591(1998).

As noted, pursuant to CCP 1141.23 the award is not subject to appeal, absent a request for a TDN or motion to vacate but judicial rulings on independent claims not submitted to arbitration are appealable; Jennings v. Marralle, 8 Cal.4th 121 (1994).

Absence of the right to appeal does not foreclose the right to prejudgment interest. In judicial arbitration, a post judgment order for costs is a final judgment pursuant to CCP 998 and CRC 3.826 (d). A party who does not obtain a more favorable judgment than awarded in judicial arbitration is required to pay pre-judgment interest; Joyce v. Black, 217 Cal.App.3d 318 (1990); Wagy v. Brown, 24 Cal.App. 4th 1 (1994).

Comment: Maynard explains the difference between judicial arbitration and arbitration of attorney-client disputes; B & P 6200.

V. Statute of Limitations  [TOC]

Submission of an action to judicial arbitration does not automatically suspend the running of time periods for statutes of limitation; CCP 1141.17 (a). For cases submitted to/or remaining in arbitration four years and six months subsequent to filing litigation, the time between that date and the date of filing TDN (CCP 1141.20) is not computed in determining whether an action should be dismissed; CCP 1141.17(b). In Howard v. Thrifty Drug & Discount Stores, 10 Cal.4th 424 (1995) the California Supreme Court imposed a duty on counsel to inform the trial court of calendaring dates; Gonzales v. Co. of L.A., 122 Cal.App.4th 1124 (2004).

W. Disqualification of Arbitrator  [TOC]

1. Statutory Disclosure: Conflict of Interest   [TOC]

A party may disqualify an arbitrator for grounds listed in CCP 170.1 or 170.6 at least five days after naming of the arbitrator; CCP 1141.8 (d). An arbitrator may self disqualify upon timely demand of any party on grounds of CCP 170.1; CCP 1141.18.

2. Rules of Court Disqualification  [TOC]

The Judicial Council authorizes a noticed motion to vacate the award six months after entry of the award if the arbitrator was subject to disqualification on grounds not disclosed before the hearing. Clear and convincing evidence is required and the motion must be filed as soon as practicable after the moving party learned of the existence of the grounds for disqualification; CRC 3.816 (a).

CRC 3.816 requires an arbitrator to disclose any matter subject to Canon 6 (d) (2) (f) and d (2) (g) of the Code of Judicial Office; or, disclose any significant personal or professional relationship with a party, attorney or law firm within the last 24 months in which compensation was paid. If a party files a motion to disqualify, the court must hold a hearing to determine whether grounds exist for disqualification and whether the arbitrator complied with rules of statutory disclosure.

Reference to Non-Court Appointed Mediators: Ch. XI-D & E

Practice: In practice, any party who files a motion to disqualify prior to arbitration under this statute probably wastes client money. Most arbitrators will just withdraw voluntarily.

X. Sanctions  [TOC]

Reitveld v. Rosebud Storage Partners L.P., 121 Cal.App.4th 250 (2005), invoking CCP 575.2,  allows the court to impose sanction of dismissal on an attorney who fails to participate in judicially ordered arbitration under local court rules.  This decision apparently conflicts with Lyons v. Wickhorst, 42 Cal.3d 911 (1997) precluding dismissal of an action for failing to participate in judicially ordered arbitration and approving only monetery sanctions pursuant to CCP 128.5.

See, Local Rules, this Ch.-D

Y. Offer to Compromise   [TOC]


CCP 998 (b) provides that “not less than 10 days prior to commencement of…arbitration (CCP1281 & 1295)…a party may serve an offer in writing upon any other party …to allow  …an award to be entered in accordance with the terms and conditions stated at than time .. . .  If the offer is accepted, the offer with proof of acceptance shall be filed with the arbitrators…who shall promptly render an award accordingly;” CCP 998 (1). The statute provides for enhanced costs payable to a party if the offer is not accepted and the other party obtains a more favorable judgment.
 
Offers to compromise are applicable to arbitration awards confirmed in a judgment; Caro v. Smith, 59 Cal.App.4th 725 (1977; CCP 998[b]). The interest calculation (CCP 3291) is applicable only to personal injury litigation and inapplicable to business related civil actions; Gourley v. St. Farm Mut. Ins. Co., 53 Cal.3d 121 (1991); George F. Hillenbrand, Inc. v. Ins. Co. of  No. America, 2005 WL 846218 (Cal.App.) [Non. Cite.] (defamation as personal injury within the meaning of Civ. Code 3291).

Revocation, or rejection, of a 998 offer must be explicit. Conduct or statements by counsel at a judicially ordered arbitration are directed toward resolution of the merits, not an implied revocation of a contractual term; Nott v. Sup. Ct., 204 Cal.App.3d 1102 (1988). A unilaterally revoked offer is revocable,  and does not trigger the cost shifting provisions of CCP 998; Marcey v. Romero, 148 Cal.App.4th 825 (2007).

CCP 998 also applies to uninsured motorist arbitration conducted pursuant to Ins. Code. 11580.2. The statute includes imposing certain costs although not pre judgment interest; Pilimai v. Farmers Ins. Exchange Co., 39 Cal.4th 133 (2006). Expert witness fees actually and necessarily incurred are also recoverable in the discretion of the arbitrator either in preparation for arbitration or during arbitration; CCP 998 (c ) (1).

Practice:  CCP 998 has been the subject of considerable debate and discussion.  This summary of the statute should be supplemented  by a close reading of all its terms before reaching a decision to invoke its provisions.  In tendering a CCP 998 offer, counsel must identify which of multiple parties, or multiple causes of action (or claims), or coordinated or consolidated claims are referenced; Bunch v. Cal. Ins. Grp., 2007 WL 3824992 (Cal.App.) [Non. Cite.).


See, also, Ch. X-Y.  Offer to Compromise.

Z. Arbitrator Testimony  [TOC]

In a subsequent civil action, Ev. Code 703.5 prohibits arbitrators from testifying to their statements, conduct, decisions or rulings in arbitration.

AA. Costs in General  [TOC]

The prevailing party is entitled to costs as in civil litigation (CCP 1032) but discretionary when the award is less than $25,000 in a Limited Civil Case (CCP 86). If a statute authorizes recovery of costs, the arbitrator may award statutory costs; CRC 3.824. The arbitrator should determine costs as part of the award; Dickens v. Lee, 230 Cal.App.3d 985 (1991). If the arbitrator finds that costs and fees should be awarded, and no TDN is filed, the prevailing party can file a cost bill. If the award is silent on costs, the prevailing party can file a cost bill after judgment is entered; Wade v. Schrader, 168 Cal.App.4th 1039 (2008); Guevara v. Brand, 8 Cal.App.4th 995 (1992).

If a trial occurs after a TDN, cost standards are governed by CCP 1141.21; CRC 3.826.

A party who disagrees with a cost bill can only file a TDN; Kelley v. Bredelis, 45 Cal.App.4th 1819 (1996). Appeal from a judgment in judicial arbitration is not permitted (CCP 1141.23) but appeal from certain post judgment orders is permitted; Kelley. The arbitrator should also address fees as well as costs in the award; Pilimai v. Farmers Ins. Exchange Co., 39 Cal.4th 133 (2006).

Comment: In an ambiguous award, or an incomplete award, the parties may seek clarification from an arbitrator; Pierson v. Honda, 194 Cal.App.3d 1411 (1987).

See, Flemens v. Looney, 2005 WL 15542 (Cal.App.) [Non. Cite.].

BB. Collateral Estoppel & Res Judicata  [TOC]

The effect of a judicial arbitration award on subsequent proceedings is unclear. In Wichman v. Mendoza, 2005 WL 3074692 [Non. Cite.] the court cites several cases on this subject; Flynn v. Gorton, 207 Cal.App.3d 1550 (1989); State Farm Mutual Auto. Ins. Co. v. Sup.Ct., 211 Cal.App.3d 5 (1989); and Lewco Iron Metals, Inc. v. Sup. Ct., 76 Cal.App.4th 837 (1999). Vandenberg v. Sup.Ct., 21 Cal.4th 815 (1999) refused to decide the issue on res judicata in contractual arbitration but denied collateral estoppel effect except to parties or those in privity.

See, Ch. XVII-D: Res Judicata & Collateral Estoppel

Chapter XI. Court Annexed (Judicial) Mediation and Voluntary Mediation: State Court   [TOC]

Introduction

"[I]mplementing alternatives to judicial dispute resolution has been a strong legislative policy since at least 1986;"  Foxgate HOA, Inc. v. Bramalea , 26 Cal.4th 1, @141 (2001); CCP 1775. A court can order mediation under certain circumstances or the parties can elect to do so. This Section focuses on court ordered mediation, but if the parties agree, the process can occur with or without litigation on file.

The literature on mediation theory and practice is voluminous and individual mediators vary widely in their styles. These materials do not discuss mediation theory nor resolution of disputes uninvolved in litigation. Mediating the litigated case differs significantly from non-litigated cases. The web site includes an article published by the author discussing this subject in more detail. The procedural rules for mediation of litigated cases, and the promise of confidentially, apply universally.

For a case discussing different forms of dispute resolution, see, Saeta v. Sup.Ct., 117 Cal.App.4th 261 (2004). Saeta outlines the role of the mediator as one of impartiality,  disclosure of conflicts of interest and appropriate withdrawal from a mediation.

Practice: CRC 3.851 applies to mediations in which a mediator or mediation firm has agreed to be included and agreed to mediate a civil case in the Superior Court panel. Rules 1620.3, 1620.4, 1620.6, 1620 have been re numbered; CRC Ch. 3  Article 2: Rules of Conduct for Mediators in Court-Connected Mediation Programs for Civil Cases; 3.850-3.868.  Ch. 4. Civil Action Program Rules; 3.870-3.878.

CRC 10.781 (b) (1) conditions participation on the list of neutrals potentially appointed by the court to comply with “ethics requirements” and CRC.

The Advisory Committee acknowledge this Rule is inapplicable to retired judges but encourages them to comply, particularly with the Code of Judicial Ethics and, presumably, with CRC 10.781 (b) (1) requiring neutrals to comply with “ethics requirements” and the CRC.

A. Mediation Defined  [TOC]

Mediation “means a process in which a neutral person[s] . . . facilitates communication between the disputants to assist them in reaching a mutually acceptable agreement;" CCP 1775 (a) 1; CRC 3.852. Mediation does not include settlement conferences under CRC 3.1380 or family conciliation proceedings and mediation of visitation and custody; Fam.Code 1800; 3160; Doe 1 v. Sup. Ct., 132 Cal.App.4th 1160 (2005); Stewart v. Preston Pipeline, Inc., 134 Cal.App.4th 1565 (2005). The Evidence Code contains the same definition of mediation and its provisions are applicable in all except the above family law proceedings; Ev.Code 1115 [a]).

California has attempted to ensure that mediation is a process of resolution uninfluenced by any pressure exerted on the participants. As noted, mediators employ a variety of techniques but cannot impose authority that interferes with the assent of the participants. Mediation is a voluntary process and in the absence of settlement no consequences occur; Lindsay v. Lewandowski, 139 Cal.App.4th 1618 (2006). Arbitration is an adversarial process resulting in an award subsequently confirmed in a judgment with limited rights of appeal.  For an example of a sitting judge attempting to induce settlement over objections of one party, see Travelers Casualty & Surety Co. v. Sup. Ct., 126 Cal.App.4th 1131 (2005).

Practice: As the Lindsay court notes, counsel should use "caution" in preparing settlements combining mediation with other ADR processes providing for resolution in the event subsequent disputes arise. CRC 3.857 provides that if a mediation can mature into an arbitration, each party must be given the opportunity to select "another neutral" to conduct the ensuing proceedings. Counsel should get explicit consent to waive this provision if they intend to use the same mediator to arbitrate.

Practice: If counsel intend to place a settlement on the trial court record pursuant to CCP 664.6 after mediation, the court must have subject matter jurisdiction. Absent litigation of a "controversy", the court lacks jurisdiction; The Housing Grp. v. United National Ins. Co., 90 Cal.App.4th 1106 (2001).

Note: In litigation, the plaintiffs are mandated to provide defendants with an information packet explaining the variety of Alternative Dispute Resolution (ADR) processes; CRC 3.221. Cross complainants must serve a copy of this information sheet to any new party; CRC 3.222.

B. Civil Action Mediation (CCP 1775)  [TOC]

CCP 1775 et seq. applies to Los Angeles County, or any other County electing to adopt provisions of the statute, and authorizes court ordered mediation ". . . in which [judicial] arbitration is otherwise required (judicially ordered arbitration pursuant to CCP 1141.11) of any civil case if the amount in controversy is under $50,000.00; CCP 1775.5. The case musts fall within the scope of CCP 1141.11 regardless of the remedy sought; CCP 1775.3.  Ev. Code restrictions under 703.5 (judges, arbitrators, mediators as witnesses) applies as does  Ev. Code 1152 (offers to compromise) and Ev. Code 1115 (legal incompetence of mediators to testify).

The presiding judge of counties outside Los Angeles may elect to participate in mediation in specified civil actions.  The election to participate is also evidenced by local court rules.  Absent participation in the Los Angeles County program, the court cannot order mediation; CCP 1775.2 (a)-(c).

The court must elect whether to order a case into arbitration or mediation (CCP 1775.4), or the parties may stipulate, but a prior order to judicial arbitration exempts the parties from mediation. Participation by all parties and counsel in the mediation is mandatory. The court may select the mediator if the parties cannot agree. The Judicial Council has issued rules tracking the language of the statute; CRC 3.870 et seq. (Civil Action Mediation Program Rules).

1. Discovery Rights   [TOC]

Discovery is not foreclosed by this Section; CCP 1775.11.  In Rojas v. Sup. Ct., 33 Cal. 4th 407 (2004) the California Supreme Court held that evidence prepared for the "purpose of mediation" is not subject to discovery or disclosure, but evidence outside that objective is discoverable; CCP 1119. Thus, facts known to percipient witnesses do not become inadmissible if they occurred outside the mediation; Ev. Code 1120(a); Doe 1 v. Sup.Ct., 132 Cal.App.4th 1160 (2005).

2. Evidence & Mediation  [TOC]

Mediation, as defined in the Evidence Code, is an informal method of attempting to resolve a dispute between parties outside the judicial system of litigation; Ev. Code 1115 et seq. Communications, negotiations or settlement discussions are confidential, and admissions or writings (as defined in Ev. Code 250) produced in the course of, or pursuant to a mediation, are inadmissible in a civil action and not subject to discovery; Ev. Code 1119. Resolution of a future dispute in a settlement agreement achieved by mediation in the event of its breach of a term[s] by one party is governed by CCP 664.6 Ordinarily a settlement is followed by a dismissal and release of all claims.

Mandatory Settlement Conferences pursuant to California Rules of Court (CRC) 3.1380 or specific sections of the Family Code are not "mediations;" Doe 1 v. Sup. Ct., 132 Cal.App.4th 1160 (2005); Ev. Code 1117 (b)(2).

a. Confidentiality of Communications  [TOC]

The Legislature has provided for comprehensive protection of privacy of communications in mediation (as defined above in the Ev. Code) and statutorily prohibits participants and the mediator from disclosing evidence of oral statements or writings; Foxgate HOA, Inc. v. Bramalea, 26 Cal.4th 1 (2001); CCP 1775; Ev. Code 703.5; 1115-1128; CRC 3.854. “All communications, negotiations, or settlement discussions by and between  participants in the course of a mediation . . . shall remain confidential” in subsequent proceedings [arbitration & litigation] and not subject to disclosure unless all parties who participate agree to disclosure; Ev. Code 1119 (c ); Doe 1 v. Sup.Ct., 132 Cal.App.4th 1160; (2005) Ev. Code 1122 (a).

Although not a ground for vacating an award under CCP 1286.2, . . . “any reference to a mediation during any . . . subsequent non criminal proceeding is grounds to vacate or modify the decision in that proceeding . . . and granting a new or further hearing  . . . if the reference materially affected substantial rights of the party requesting relief; Ev. Code 1128.  This statute would apply to arbitration as well as litigation; In re Marriage of Logan, 2007 WL 2994640 (Cal.App.) [Non.Cite.]

The mediator's absence in a conversation between parties or counsel is irrelevant and confidentiality applies as long as the communication is material. Any waiver of confidentiality must be express, not implied; Rojas v. Sup. Ct., 33 Cal. 4th 407 (2004); Ev. Code 1119 (findings or reports of mediator); In re Marriage of Van Horn, 2003 WL 21802273 (Cal.App.) [Non. Cite.]. In an unusual case, communications between attorney and client were not confidential    when the former client sued his counsel anc could be utilized in later action; Cassel v. Sup.Ct., 2009 WL 3766430 [Rev. Gtd.].

Exclusion of mediation communications is modified by Ev. Code 1120(a) and does not exclude evidence otherwise admissible or discoverable outside of mediation merely because used or introduced during mediation; Rojas; Wimsatt v. Sup.Ct., 152 Cal.App.4th 137 (2007). Ev. Code1122-24 permit admissibility of mediation statements [if particular requirements are met]; Ev. Code 1122(a) [parties agree in writing to disclosure]; Ev. Code 1123 [settlement agreements “prepared in the course of, or pursuant to, a mediation” [under certain conditions]; Ev. Code1124 [oral agreements admissible under certain conditions]; Stewart v. Preston Pipeline, Inc., 134 Cal.App.4th 567 (2005).

The scope of the phrase “ a written settlement agreement prepared in the course of, or pursuant to a mediation, is not made inadmissible…”, as stated in Ev. Code 1123,  can include an exchange of letters between counsel outside the presence of the mediator; Alco Agriservices, Inc. v. Giampoli, 2007 WL 1068150[ (Cal.App.) [Non.Cite.].

In arbitration, CCP 1128 provides that an unauthorized reference of  arbitration proceedings or the award  constitutes an “irregularity of proceedings”(CCP 657) in a subsequent trial.  In mediation, absent a written agreement to the contrary, admissions made subsequent to the close of  mediation are not inadmissible; Regents v. Sumner, 42 Cal. App.4th 1209 (1996). The “end” of mediation, for purposes of confidentiality, is outlined in several conditions listed in CCP 1125.

Comment: Rojas and Foxgate are the leading cases on mediation, confirming the rule of confidentiality despite censorious conduct by counsel in Foxgate.

Innumerable cases are resolved by mediation. Whether a particular dispute resolution process qualifies as a "mediation" is a mixed question of law and fact but the "process" and "result" must comport with the statutory definition to enforce confidentiality; Saeta v. Sup.Ct., 117 Cal.App.4th 261 (2004); Doe 1 v. Sup.Ct., 132 Cal.App.4th 1160 (2005); Alkop Agriservices, Inc. v. Giampoli, 2007 WL 1068150[ (Cal.App.) [Non.Cite.]. According to one court, the term "binding mediation" is meaningless; Lindsay v. Lewandowski, 139 Cal.App.4th1618 (2006).

Note: For a succinct discussion of the confidentiality provisions of the Evidence Code, see   Simmons v. Ghaderi, 44Cal.4th 570 (2008) disapproving exceptions to mediation statutes on the ground of implied waiver or estoppel.

In Dino v. Pelayo, 145 Cal.App.4th 347 (2006) the court approved joint representation by counsel of two parties in mediation as long as the parties signed a waiver of conflict of interest and their litigation interests were aligned.  The defendant in Dino had challenged joint representation on grounds a conflict of interest arose under Ev. Code 1119 (c ) and CRC 3.854.

See, Weblog, December 13, 2006.  Website: judgewaddington-adr.com.

See, Weblog, June 21, 2007.  Website: judgewaddington-adr.com

b. Mediator Reports & Findings   [TOC]

Mediator reports or findings are inadmissible unless the parties agree otherwise; Ev. Code 1121.

c. Mediator Testimony  [TOC]

As long as a process qualifies as a "mediation", mediators are statutorily judicially incompetent to testify (or submit declarations) in any subsequent civil proceeding, subject to narrow exceptions (Ev. Code 703.5); Saeta v. Sup.Ct., 117 Cal.App.4th 261 (2004); Rojas v. Sup. Ct., 33 Cal. 4th 407 (2004).

d. Offers to Compromise  [TOC]

Offers to compromise during a mediation are inadmissible in subsequent litigation, also subject to narrow exceptions; Ev. Code 1152.  See, Ch. X; Y: Offer to Compromise.

e. Conclusion of Mediation  [TOC]

Confidentiality, and concomitant conclusion of mediation, are outlined in Ev. Code 1125.

3. Statute of Limitations  [TOC]

Cases referred to mediation are subject to relevant statutes of limitations; CCP 1775.7. An action ordered to mediation is tolled from the date four years six months after filing (CCP 583.310) until a statement of non-agreement (CCP 1775.9) is filed; CCP 583.10; Gonzales v. Co. of Los Angeles, 122 Cal. App.4th 1124 (2004). A defendant could also move to dismiss under the three year discretionary statute; CCP 583.360. There is no bright line, each case is fact specific.

See, this Chapter-D-for rules on impartiality, conflcts of interest, disclosure and withdrawal; CRC 3.855.

C. Settlement [TOC]

Settlement of litigation occurs either as: a result of negotiations between the parties and counsel; mediation ordered by the court (CCP 1775) or voluntarily initiated by counsel; or as a result of a mandatory settlement conference ordered by the court; CRC 3.1380. Because of the differences between these alternatives, enforcing a settlement can vary. Mediation expressly provides for confidentiality and the process preceding a settlement is important to define; Evid. Code 1119; 1123.

For a case discussing this subject, and mediation/confidentiality in general, see Simmons v. Ghaderi, 44 Cal.4th 570 (2008);Wimsatt v. Sup.Ct., 152 Cal.App.4th 137 (2007). CCP 664.6 provides: "If parties to pending litigation stipulate, in a writing signed by the parties outside the presence of the court or orally before the court, for settlement of the case, or part thereof, the court upon motion, may enter judgment pursuant to the terms of the settlement. If requested by the parties, the court may retain jurisdiction over the parties to enforce the settlement until performance in full of the terms of the settlement." CCP 664.6 requires settlement of "pending litigation"; Kirby v. So. Cal. Edison Co., 78 Cal.App.4th 840 (2000). No new lawsuit is required.

The trial court determines in the first instance whether the parties have entered into an enforceable agreement, acting as a the trier of fact and many consider oral testimony or  declarations.  Factual findings are subject to limited review. But CCP 664.6 does not authorize the judge to create material terms of the settlement as opposed to deciding what terms the parties themselves have previously agreed on; Osumi v. Sutton, 151 Cal.App.4th 1355 ( 2007) (emphasis in original).

As noted, mediation of a dispute can occur when litigation is on file. If no litigation is on file, the parties cannot confer jurisdiction on the court by petitioning to enforce a settlement under CCP 664.6, or seek appointment of a Temporary Judge or Referee; Housing Grp. v. United Nat'l. Ins. Co., 90 Cal.App.4th 1106 (2002). A stipulation to appoint a mediator for settlement as a Temporary Judge or Referee under CCP 638 is ineffective in the absence of litigation.

A settlement is a contract, and the legal principles applicable to contracts in general apply to settlement contracts; Weddington Prods., Inc. v. Flick, 60 Cal.App.4th 793 (1998). The burden is the moving party to establish the elements of a valid contract; Stewart v. Preston Pipeline, Inc., 134 Cal.App.4th 1565 ( 2005).

Assuming jurisdiction exists, CCP 664.6 permits the parties to confirm the settlement in a judgment by an expedited motion whether the case settled outside of court or before the court. The stipulation must be signed by the parties or orally stated before the court.

Levy v. Sup.Ct., 10 Cal.4th 578 (1995) requires the settlement signed by the "parties", not counsel. But Levy did not exclude the possibility of enforcing a settlement by alternative procedures, i.e., summary judgment, a suit in equity, or amendment of the pleadings. Thus the absence of a signature by one of the parties does not necessarily vitiate the stipulation; Stewart.

Neither the Statute of Limitations nor Statute of Frauds apply to a settlement agreement unless not in compliance with statutory language of CCP 664.6; Pietrobon v. Libarle, 137 Cal.App.4th 992 (2006).

The court may retain jurisdiction to enforce the terms of the settlement if requested by the parties; Elyaoudayan v. Hoffman, 104 Cal.App.4th 1421 (2003). Or, the settlement agreement may authorize arbitration of any future disputed issues or the terms of the settlement; Universal Cities, Inc. v. Sup.Ct., 110 Cal.App.4th 1273 (2003). The request to retain jurisdiction must be explicit, occur during the pendency of litigation, and not subsequent to a dismissal; Wackeen v. Malis, 97 Cal.App.4th 429 (2002); Kohn v. Jayamar-Ruby, 23 Cal.App.4th 1530 (1994).

Good Faith Settlements

Wade v. Schrader, 168 Cal.App. 4th discusses the effect of a settlement agreement by other tortfeasors in determining whether the credit may be calculated and subtracted from the award. The court also notes the better practice is to submit this issue to the court in confirming an award rather than waiting until a party seeks satisfaction of an award.   

If the mediation is successful, the parties will ordinarily confirm the agreement in writing. Mediation is confidential and prohibits disclosure of its terms and the “writing” is inadmissible in evidence in a civil action (Ev. Code 1119[a]) unless: the settlement agreement itself provides the settlement agreement is admissible or subject to disclosure; Ev. Code 1123 (a);  the parties agree that the writing is “enforceable or binding or words to that effect;” Ev. Code 1123 (b); Auguston v. Texaco Refining & Marketing, Inc., 2005 WL 2277732 (Cal.App.) [Non.Cite.]; all parties orally or in writing agree and in compliance with Ev. Code 1118 (oral agreement); Ev. Code 1123 (c); or if offered to show fraud, duress, Ev. Cod 1123 [d].

But section Ev. Code 1123 (c) provides that all parties can agree orally or in writing to disclosure subject to compliance with section Ev. Code 1118 (requires various methods of confirmation of disclosure by all parties) and does not require provision for admissibility itself. Accordingly, a pre mediation provision can be enforced independently and prior to the settlement depending on the words used;  Estate of Thottam v. Thottam, 165 Cal.App.4th 1331 (2008). 

  Nothing in Ev. Code 1123 (c) requires express agreement in writing permitting disclosure be made at or after the time of settelenment and a pre mediation settlement agreement is enforceaable
 
The setlement must unambiguously signify the intent of the parties to be bound by the agreement whether the terms refer to arbitration of future disputes, choice of law, forum selection or remedies; Fair v. Bakhtiari, 40 Cal.4th 189 (2006).

See, Weblog, December 18, 2006 for an explanation of Fair v. Bakhtiari and its holding that an arbitration clause does not fulfill the requirements of Ev. Code 1123 ( permitting a settlement agreement admissible and enforceable) unless the parties sign the agreement explicitly mandating arbitration of future disputes.

See, Weblog, April 20, 2007 discussing the unavailability of CRC 1385 to serve as a vehicle to enforce a settlement.  CRC is a trial management tool failing to provide entry of judgment and or dismissal-it is only a management tool for trial courts to track settlement and dismissal; Irvine v. Regents of Cal., 149 Cal.App.4th 994 (2007).

Ev. Code 1123 (a) states a settlement agreement is admissible if it provides its terms  are “admissible or subject to disclosure, or words to that affect.”  On remand, the Court of Appeal said that Ev. Code 1123 (a) requires the same narrow interpretation of specificity required by the Supreme Court in Fair; Fair v. Bakhtiari, 2007 WL 1031708 ) (Cal.App.) [on remand; Non.Cite].

Practice: To insure that , all parties agree to the terms, counsel and clients should sign the agreement. A settlement agreement is a contract and legal principles apply to allegations of breach, i.e., mutual assent; Civ. Code 1550; 1565; see also Meyer v. Benko, 55 Cal.App.3d 937 (1948). An incomplete or ambiguous settlement agreement is grounds for the court to refuse enforcement; Weddington Prods., Inc. v. Flick, 60 Cal.App.4th 793 (1998); Ersa Grae Corp. v. Flour Corp., 1 Cal.App.4th 613 (1991).  Terry v. Conlan, 131 Cal.App.4th 1445 (2005) illustrates an ambiguous settlement written after settlement negotiations.

The most effective method of settlement is a written document containing all terms and conditions of the agreement acknowledged by the signature of all parties and their counsel. In some cases, details of a settlement are reserved for future discussions. This practice may be necessary but should be avoided if possible. In the event additional terms require discussion, the signed agreement should clearly state that these items do not impair the validity of the original document. Some provision for resolving additional terms of discussion should be included to avoid endless arguments, or specify mediation as the format of settlement terms; Fair.

Comment: To read a case involving considerable confusion among the parties and the additional expense incurred in resolving whether the terms of a settlement could be enforced, see: Tender Loving Things, Inc. v. Robbins, 2005 WL 902648 (Cal.App.) [Non.Cite.]; RF Video, Inc. v. Dream Stage Ent., Inc., 2005 WL 1274453 (Cal.App.) [Non.Cite.].

Clauses to be considered in settlement: choice of law, including use of state substantive and /or procedural law; choice of forum; issues for resolution; court specifically retains jurisdiction to enforce settlement of disputed terms only (or by mediation or arbitration); or, future issues resolved by arbitration; rules of arbitration service provider, if any; Evans v. CoverStone Development Co., 134 Cal.App.4th 151 (2005).

Comment: There are no bright lines here. An appellate court can characterize a "settlement” either way but the terms must be "sufficiently certain" to enforce; Tender Loving Things; CRC 3.829 [judicially ordered mediation]. In Terry v. Conlan, 131 Cal.App.4th 1445 (2005), the court said: . . ." we do not mean to say that a failure to agree on the means to achieve settlement goals will necessarily cause a settlement to fail  . . . many settlements are reached by an initial agreement on the goals of settlement. However, agreement to the goals alone may not result in a judicially enforceable settlement agreement;" Terry @1458.

As above, to assure the ability to enforce the agreement, parties should ask the court to retain jurisdiction; Stone Age Equipment, Inc. v. Nelson Sports, Inc., 2005 WL 1208522 (Cal.App.) [Non.Cite.].

Practice:  The California Supreme Court has emphasized the importance of securing the consent of the client to participate in mediation, arbitration, settlement or compromise of a client's claim. Employment of an attorney does not vest implied or ostensible authority to settle or compromise a claim; Blanton v. Womancare, Inc., 38 Cal.3d 396 (1985).

Check list: The proper party must agree to the settlement. In insurance cases, other than those requiring a party's consent, the insurance carrier directs and determines settlement within policy limits; Fiege v. Cooke, 125 Cal.App.4th 1350 (2004);

The evidence must establish the liability policy authorizes the insurer to settle; Elnekave v. Via Dolce HOA, 142 Cal.App.4th 1193 (2006);

In a mandatory settlement conference, the party must have authority to settle; CRC 3.1380.

Enforcement other than CCP 664.6 may be possible; Elnekave; Gauss v. GAF Corp., 103Cal.App.4th 1110 (2002)

If the parties agree to arbitrate future disagreements subsequent to the settlement, the terms should designate who will preside, i.e. the same arbitrator, the same panel or different arbitrators; Patchett v. Bergamot Station, Ltd., 143 Cal.App.4th 1390 (2006) [Rev. Den.].

D. Disclosure by Mediators  [TOC]

The Judicial Council has adopted stringent rules requiring disclosure of personal and professional interests applicable to mediators. "The mediator must maintain impartiality toward all participants at all times; CRC 3.855 (a)." To ensure compliance with this mandate, the rule requires mediators to provide a continuing disclosure to the parties of past and present interests or relationships; affiliations of a personal, professional or financial nature; existence of any grounds for disqualification under CCP 170.1; CRC 3.855 (b).

E. Disqualification of Mediator  [TOC]

Emphasizing the confidentiality of mediation, the court in Barajas v. Oren Realty and Development Co., 57 Cal.App.4th 209 (1997) held that counsel cannot be disqualified based on participation in a mediation with the same client in subsequent litigation

Note: Barajas may no longer be precedent under disclosure rules, above.

F. Mediation as Condition Precedent to Arbitration  [TOC]

Arbitration clauses frequently provide for mediation of a controversy, and an agreement to arbitrate (condition) if the mediation is unsuccessful. Parties may be reluctant to disclose information to the mediator that would remain undisclosed to the other party prior to arbitration.

See, Trapani v. Rankin, Sproat, Mires, Beaty & Reynolds, 2005 WL 2212030 (Cal.App.) [Non.Cite.]; Templeton Development Corp. v. Sup.Ct. 144 Cal.App.4th 1073 (2006) [public construction contract].

G. Mediation Fees & Costs  [TOC]

A contract requiring mediation as a condition precedent to arbitration-or trial- warrants denial of fees to a party who refuses to participate in mediation; Leamon v. Krajkiencz, 107 Cal.App.4th 424 (2003). A party who fails or refuses to mediate pursuant to a contractual clause prior to initiating arbitration is subject to payment of fees and costs incurred by the opposition; Kahn v. Chetcoti, 101 Cal.App. 4th 61 (2002).

H. Insurance Mediation  [TOC]

Insurance Code 10089.70 authorizes the California Department of Insurance to implement a mediation program for earthquake insurance claims and automobile collision coverage. Certain preconditions apply. As above, communications during mediation are confidential; Ins. Code 10089.80(d).

I. Real Estate Mediation  [TOC]

Residential real estate documents between buyer and seller frequently require a party to mediate a dispute before filing an action, i.e. in effect, a condition precedent. The standard form in residential real estate contracts provides that a prevailing party in arbitration who fails or refuses to mediate cannot receive attorney fees; Frei v. Davey, 124 Cal.App.4th 1506 (2004). “Seeking mediation is a condition precedent to the recover of attorney fees by the party who initates the action;” Frei; Lange v. Schilling, 163 Cal.App.4th 1412 (2008).  In G & S Assisted Care-Valley Vista LLC, 2005 WL 615644 (Cal.App.) [Non.Cite.) the contract required mediation but is inapplicable if a party files a lis pendens permitted by the language of the contract; Frei; Blackburn v. Charnley, 117 Cal.App.4th 758 (2004).

1.  Development Projects  [TOC]

Government Code 66030 provides for mediation of development projects and a mandatory settlement process in Superior Court in the event the mediation is unsuccessful. This condition is not arbitration, but a hybrid process of dispute resolution.

2.  Subcontractors  [TOC]

Subcontractors are protected against contractors who seek enforcement of a contractual dispute resolution clause (litigation, arbitration, and “disputes otherwise determined”) outside California.  CCP 410.42 includes mediation within its coverage and contractors can only enforce this form of dispute resolution in California courts. The statute prohibits any contractual term preventing subcontractors from obtaining judgments in California courts; Templeton Development Corp. v. Sup.Ct., 144 Cal.App.4th 1073 (2006).

Practice: Mediation of real estate disputes is frequently helpful even if premature. Counsel can stipulate not to file litigation until a time certain and set a mediation date in the future; or they can arrange for document exchange, schedule depositions or reduce the need for extensive discovery even if the parties cannot agree to settle. The same format is applicable to commercial agreements, but residential real estate disputes frequently involve few documents and are in possession of both parties.

J. Family Law Mediation  [TOC]

The courts recognize that under some circumstances one party to a divorcing marriage is in a subordinate financial or power position during an interspousal transaction. Family Code 721 (b) applies a presumption of undue influence but a marital settlement agreement achieved in a mediation does not apply after a mediation; In re Marriage of Kieturakis, 138 Cal.App.4th 56 (2006).

K. Rescission of Agreement   [TOC]

As above, a settlement agreement may provide that any disagreement over the terms of a dispute as to its application will be resolved by arbitration. In Universal City Studios, Inc. v. Sup.Ct., 110 Cal.App.4th 1273 (2003) the moving party attempted to rescind the settlement terms by invoking the arbitration clause. The settlement agreement itself is admissible in a subsequent motion to compel arbitration but in Fair v. Bakhtiari, 40 Cal.4th 189 (2006) the court severely limited public disclosure of the terms. Arbitration service provider Rules of confidentiality should also be considered.

L. Appellate Mediation  [TOC]

In Campagnone v. Enjoyable Pools & Spas Service & Repairs, Inc., 163 Cal.App. 4th 566 (2008) [Non.Cite.Non. Pub.] the Third District enforced its sanctions rules on parties and counsel who do not appear for mediation. Other Districts have mediation of appeals and counsel must comply with the rules to assure a succerssful mediation.

Practice: The Superior Court is required to prepare a list of mediators to record complaints of non compliance with CRC rules; CRC 3.865.  Effective January 2007 the Rules were amended to assure confidentiality of complaint procedings; CRC 3.867.

CRC 3.868 (formerly )1622.3) was amended to disqualify any person who received information or participation in the complaint process from participating in mediation of the case.

            M. Complaint Procedure in Mediation

Inevitably some participants will complain about the conduct of a mediator during the course of/ or after a mediation.  The Rules of Conduct and the procedure for complaining about a mediator’s violation of those rules is summarized in CRC 3.865 et seq. (to be renumbered after Jan. 1, 2010).

Chapter XII. Jurisdiction: State Court  [TOC]

A. Jurisdiction in General  [TOC]

Although personal jurisdiction of a party is an issue infrequently associated with arbitration, in litigation it is always a prerequisite for a court to act. The leading cases are Vons Companies, Inc. v. Seabest Foods, Inc., 14 Cal.4th 434 (1996); Snowney v. Harrah's Ent., Inc., 35 Cal.4th 1054 (2005); Carretti v. Italpast, 101 Cal.App.4th 1236 (2002). In Ikerd v. Warren T. Merrill & Sons, 9 Cal.App.4th 1833 (1992) the court held that regardless of his personal knowledge of the proceedings, the party had never been served with a demand for arbitration. Accordingly, the arbitrator had no jurisdiction.

Note: Service on a corporation, absent alter ego, is not service on the individual shareholder or officer; Ikerd.

The absence of jurisdiction connotes an entire absence of judicial power to hear or determine the case; an absence of authority over the subject matter of the parties; or the court lacks the power to act except in a particular manner; or to give certain kinds of relief; or act without the occurrence of procedural conditions; Abelleira v. District Court of Appeal, 17 Cal.2d 280 (1941); Bosworth v. Whitmore, 135 Cal.App.4th 536 (2006).

Cross Reference: In exercising diversity jurisdiction, a federal court applies state personal jurisdictional law and in compliance with federal due process; CCP 410.10; Fireman's Fund Ins. Co. v. Nat'l. Bk. of Coops., 103 F.3d 888 (9th Cir. 1996); Shute v. Carnival Cruise Lines, 934 F.2d 1091 (9th Cir. 1991).

1. Notice to Arbitrate  [TOC]

In some cases, the arbitration clause in the contract provides for "notice" to the other party to arbitrate in the event of a dispute; CCP 1290.4. In the absence of "notice", a summons and complaint is not required, and a party can compel arbitration of a party who refuses by filing and serving a petition to arbitrate, citing the arbitration clause; CCP 1281.2; Davis v. Hamedany, 2005 WL 678572 (Cal.App.) [Non.Cite.].
A party who alleges failure of service cannot attend or participate in an arbitration and then appeal on grounds the court-and arbitrator-lack jurisdiction. This kind of game-playing is not tolerated; Cummins v. Future Nissan, 128 Cal.App.4th 321 (2005).

See, Ch. XV-B-5 for discussion of CCP 1290.4.

2. Service of Suit Clause  [TOC]

Arbitration clauses frequently contain a service of suit clause, i.e., an agreement to submit to the jurisdiction of courts for designated purposes related to the contract in which the clause appears. A service of suit clause does not create an ambiguity or waive the right to arbitration. In addition, if the arbitration agreement provides for execution of the contract in California, CCP 1293 confers jurisdiction on the parties; Boghos v. Certain Underwriters at Lloyd's of London; 36 Cal.4th 495 (2005).

B. Subject Matter Jurisdiction   [TOC]

1. Consent to Jurisdiction [TOC]

In California, jurisdiction may be general or specific; Cassiar Mining Corp. v. Sup. Ct., 66 Cal.App.4th 550 (1998). If the parties have signed an arbitration agreement, the court presumes consent to jurisdiction to enforce an order to arbitrate and entry of judgment on an arbitration award; "The making of an agreement in this State shall be deemed a consent of the parties thereto to the jurisdiction of the courts of this State to enforce such agreement by the making of any orders. . . and by entering of judgment on an award under the agreement;" CCP 1293.

2.  Arbitrator Authority  [TOC]

In the context of arbitration, subject matter jurisdiction-in a sense-includes the decision whether the court (judicial forum) or the arbitrator (arbitrable forum) will decide a certain type of controversy, or decide issues that are part of the controversy subject to arbitration; Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). The Supreme Court has characterized this as the doctrine of "arbitrability." The parties may specifically confer that authority on the arbitrator directly without court intervention, or, if the court orders arbitration, the arbitrator determines the scope of arbitrable issues; First Options of Chicago v. Kaplan, 51 U.S. 938 (1995). The scope of issues is determined by the arbitration clause; Lane v. Forecast Grp., LP, 2004 WL 1879759 (Cal.App.) [Non.Cite.]

California has described arbitration as a suit in equity to compel specific performance of a contract; Rosenthal v. Grt. Western Fin. Secs. Corp., 14 Cal.4th 394 (1996). In Brock v. Kaiser Foundation Hospitals, 10 Cal. App.4th 1790 (1992) the court distinguished the nature of a civil action from arbitration. The right to file a petition to compel arbitration depends upon the terms of the contract and statutory authority, not the existence of a legal action.

Note: For cases on subject matter and personal jurisdiction, generally: See, Virtualmagic Asia, Inc. v. Fil-Cartoons, Inc., 99 Cal. App. 4th 228 (2002); Bridgestone Corp. v. Sup.Ct., 99 Cal. App. 4th 767 (2002); Carretti v. Italpast, 101 Cal.App.4th 1236 (2002).

C. Judicial Jurisdiction in Arbitration  [TOC]

CCP 1292.6 vests the court with power to retain jurisdiction in any subsequent filing of a petition involving the same agreement to arbitrate the same controversy. This power does not include authority to dismiss an arbitration previously compelled; Blake v. Ecker, 93 Cal.App.4th 728 (2001). After granting a petition to compel arbitration and stay litigation,". . . the action at law sits in the twilight zone of abatement with the trial court retaining merely vestigial jurisdiction . . . "consist[ing] of a determination to review any award; Brock v. Kaiser Foundation Hospitals, 10 Cal. App.4th 1790 (1992); Depierro v. Lachut, 2005 WL 615834 (Cal.App.) [Non. Cite].  The court should vacate the stay of litigation and dismiss the civil action because of the res judicata effect of the award;  Brock. The rule is the same in an arbitraion submitted by the parties without judicial intervention; Briggs v. Resolution Remedies, 168 Cal.App.4th 1395 (2008).

Accordingly, the trial court cannot enter a default after ordering the case to arbitration (or the parties consent to arbitration). The arbitrator can hold a noticed hearing and enter a default; Bosworth v. Whitmore, 135 Cal.App.4th 536 (2006).

Note: The Courts of Appeal do not agree on this rule; see, cases cited in Blake.

Breck and Brock were distinguished, or undermined, by Cardiff Equities Inc. v. Sup.Ct., 166 Cal.App.4th 1541 (2008).  Plaintiff filed a Complaint alleging defendants violated a partnership agreement. On petition of the defendants to compel arbitration, the court ordered the controversy to arbitration pursuant to an arbitration clause in the contract and stayed litigation. Plaintiff subsequently dismissed the Complaint (without prejudice) and filed a similar Complaint alleging violation of a separate guarantee agreement underlying the partnership agreement. The guarantee agreement lacked an arbitation clause.

The trial court found the two agreements “intertwined,” stayed the litigation in the guarantee action and enforced its original order to arbitrate the partnership controversy. Plaintiff filed  mandate seeking an order vacating the stay of the guarantee agreement.

 According to the court 2-1 majority in Cardiff Equities, the plaintiff was entitled to dismiss his original partnership action and proceed to litigate his guarantor action. And, that the evidence in both contracts was “intertwined” and warranted potential consolidation and stay of litigation, constituted no objection to dismissal of  the original partnership contract.


Comment:  By sanctioning dismissal of the Complaint in the partnership action, the Cardiff court invoked  litigation procedure in lieu of arbitration procedure.  When a court has ordered arbitration of a controversy, its jurisdiction ceases except to appoint an arbitrator under certain circumstances, issue provisional relief, and rule on awards.  The plaintiff in Cardiff, in effect, vacated court ordered arbitration himself on grounds that a party can dismiss litigation without prejudice.

What is the current status of the arbitration order? Because the partnership agreement contained an arbitration clause, the court had jurisdiction to order arbitration.  But the guaranty agreement  lacked an arbitration clause and was subject to litigation.   Assuming Cardiff does not prevail in litigating the guarantee contract action, can he now return to court to arbitrate the partnership case? What is the res judicata effect of a judgment in the guarantee contract case on the arbitration in the partnership case?

Arbitrators retain power to dismiss for failure to proceed in contractual arbitration pursuant to CCP 583.310; Young v. Ross-Luce Med. Grp., 135 Cal.App.3d 669 (1982) [dismissal pragmatically an award subject to appeal].

In Berglund v. Arthroscopic & Laser Surgery Center of San Diego, L.P.,  44 Cal.4th 528 (2008 ) the court permitted judicial review of an arbitrator's power to issue subpoenas to non-parties although the moving party must first seek relief from the arbitrator (protective order).

Note: Federal and California courts agree that the arbitration clause, although included in a contract, requires separate analysis from the merits of he case; Blake.

Unlike a petition to compel arbitration filed in court on grounds a party refused to arbitrate, if an arbitration clause is self executing its provisions may obviate the need to resort to statutory procedure; Kustom Kraft Homes v. aleivenstein, 14 Cal.App.3d 805 (197).

See, Ch. XV-A; Self-Executing Arbitration Clause.

Reference: Ch. XX-N: Default

D. Appellate Jurisdiction  [TOC]

California and federal courts have rejected arbitration clauses attempting to confer jurisdiction on the courts to review legal error in arbitration. Parties cannot expand jurisdiction by contract to include a review of the award; Crowell v. Downey Comm. Hosp. Foundation., 95 Cal.App.4th 730 (2002); National Union Fire Ins. Co. v. Nationwide Ins. Co., 69 Cal.App.4th 709 (1999); Old Republic Ins Co. v. St. Paul Fire & Marine Ins. Co., 45 Cal.App.4th 631 (1996). But an arbitration service provider can offer parties the right to appeal to a panel of arbitrators; Cummings v. Future Nissan, 128 Cal.App.4th 321 (2005).

Cross Reference: Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987 (9th Cir. 2003) [9th Cir. rule is the same as California]; Gateway Techs. v. MCI Telecommunications Corp., 64 F.3d 993 (5th Cir. 1995).

E. Arbitrator Jurisdiction  [TOC]

As noted in Section A of this Chapter, the term “jurisdiction” varies contingent on the text in which it is used. In some cases the word connotes the absence of authority in a tribunal to exercise its power.  In another context, the terms signifies the complete absence of any power to act; Abelleira v. DCA, 17 Cal.2d 280 (1941).  An arbitrator who acts in excess of jurisdiction constitutes a voidable act-not void. As such, the parties have the right to correct any arbitrable deficiency, as in waiving the statutory time for correcting an award; Porteous v. Porteous, 2006 WL 3308430 (Cal.App.) [Non.Cite.].

The arbitrator derives jurisdiction from the court ordering the parties to arbitration. Once the arbitrator assumes jurisdiction, the court can only intervene if one party seeks provisional relief (CCP 1281.8) or in response to a motion to disqualify the arbitrator; CCP 1281.9; Abrahamson v. Juniper Networks, Inc., 115 Cal.App.4th 638 (2004). Courts apply a rule of substantial deference to an arbitrator’s jurisdictional determinations; Ajida Technologies, Inc.v. Roos Instruments, Inc., 87 Cal.App.4th 534 (2001); Patchett v. Bergamot Stn., Ltd, 143 Cal.App.4th 1390 (2006) [Rev. Den.].

A party aware of a “jurisdictional” defense, i.e., statute of limitations, or an allegedly illegal contract, must raise it at the earliest opportunity rather than awaiting the result of the award; Cummings v. Future Nissan, 128 Cal.App.4th 321 (2005).

F. Foreign Corporations[TOC]

Corporations Code 2203 provides that a foreign corporation transacting intrastate business in California without a certificate of qualification consents to jurisdiction in the

state.

See, also Rev. & tax. Code 23304.1; Ehlers Elevators, Inc. v. Beta Seed Co., 2002 WL 31492719 (Cal.App.) [Non.Cite.].

Chapter XIII. Preemption & Policy: State Court   [TOC]

Introduction

Federal preemption of state anti-arbitration law is outlined in the Section "Initiating Arbitration in Federal Court," Part I, Ch. IV. A truncated version of that discussion is included here to alert counsel that commercial arbitration in state court is subject to potential federal preemption of California law in some cases.

A. Federal Preemption in State Court  [TOC]

1. Federal Arbitration Act (FAA) Preemption  [TOC]

The Supremacy Clause and Commerce Clause of the United States Constitution invest Congress with power to regulate interstate "commerce", and the Federal Arbitration Act (FAA) preempts State anti-arbitration statutory, decisional law or adminstative agencies; Preston v. Ferrer, 128 S.Ct. 978 (2008); Southland Corp. v. Keating, 465 U.S. 1 (1984); Rosenthal v. Grt. Western Fin. Secs. Corp., 14 Cal.4th 394 (1996). Administrative regulations are also included within the scope of the FAA; City of New York v. FCC, 486 U.S. 57 (1988); Securities Ins. Assn. v. Connolly, 883 F.2d 1114 (1st Cir.1989). Southland holds that arbitration agreements may not be invalidated on grounds a state law provides a non-waiveable judicial forum to resolve disputes involving interstate commerce.

Cross Reference: Valentine Capital Asset Management, Inc v. Agahi, 174 Cal.App.4th 606 (2009).

An action filed in state court and not removed to federal court is potentially governed by the preemptive scope of the FAA if the underlying transaction "affects commerce;" Hedges v. Carrigan, 117 Cal.App. 578 (2004). The trial court must address the issue of preemption first (Woolls v. Sup.Ct., 127 Cal.App.4th 197 [2005])) and the burdern of proof lies on the party alleging preemption; Shepard v. Mackay Enterprises, Inc., 148 Cal.App.4th 1092 (2007); Basura v. U.S. Home Corp., 98 Cal.App.4th 1205 (2002). The phrase "commerce", initially defined by the Supreme Court in Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995) and confirmed in Citizen's Bank v. Alafabco, Inc., 539 U.S. 52 (2003) is interpreted to the fullest extent of Congressional power; Doctor's Assoc. v. Casarotto, 517 U.S.681 (1996); Perry v. Thomas, 482 U.S. 483 (1987); Warren-Guthrie v. Health Net of Ca., 84 Cal.App.4th 804 (2000) [disapproved on other grounds]; Cronus Investment, Inc. v. Concierge Services, Inc., 35 Cal.App.4th 376 (2005); Hedges v. Carrigan.

California courts have applied the definition of "commerce" paralleling federal law; Shepard; [question of “commerce” not arise from the particular part of a transaction involving interstate commerce];Erickson v. Aetna Health Plans of California, Inc., 71 Cal. App. 4th 646 (1999); Warren-Guthrie v. Health Net of Ca., supra; Mount Diablo Med. Ctr. v. Health Net of California, Inc.,101 Cal.App.4th 711 (2002) f.n.5; CCP 1281; Hedges v. Carrigan, above.

Not all State law is preempted, but the FAA preempts substantive or procedural state law inhibiting or obstructing the principle objectives of the FAA, i.e., enforcing written agreements among parties who agree to arbitrate their disputes; Chevron v. Hammond, 726 F.3d 485 (9th Cir.1983). No federal policy favors arbitration under a set of specific procedural rules and State procedural law facilitating arbitration, rather than obstructing the process, does not conflict with the objectives of the FAA; Volt Information Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. University, 489 U.S.468 (1998); New England Energy, Inc. v. Keystone Shipping Co., Inc., 855 F.2d (1st Cir.1988); Aceros Prefabricados S.A. v. TradeArbed, Inc., 282 F.3d 92 (2d Cir. 2002); Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2005).

Whether a transaction involves interstate commerce is a question of law; Basura v. Home Corp., [modified] 99 Cal.App.4th 815G (2002).

Examples of preemption doctrine asserted:

Contractual limitations: State cannot require special rules (size of font) applicable to arbitration clauses in contracts; Doctor's Assoc. v. Casarotto, 517 U.S.681 (1996);

Real estate contracts: CCP 1298.7 permits a party alleging personal injury or wrongful death to initiate litigation despite an arbitration clause in the underlying real estate contract. The FAA preempts this statute if the moving party can establish the contract "affected" interstate commerce; Shepard v. Edward Mackay Enterprises, 148 Cal.App.4th 1092 (2007; Basura.  Compare: Villa Milano HMO v. Il Devorge, 84 Cal.App.4th 819 (2002) [condominiums]. CC 1298.7 references CCP 337.1 in the event of injury resulting from defective planning or construction of real property; Basura;

Real estate clauses; CCP 1298 [compliance with notice and format]; Hedges v. Carrigan, 117 Cal.App.4th 578 (2004;

Residential contracts, less than four units; Woolls v. Sup.Ct., 127 Cal.App.4th 197 (2005);

Wages & Hours: Statutorily non-arbitrable wage and hours claims (Labor Code 229 preempted); Perry v. Thomas, 482 U.S. 483 (1987). Labor Code 229 specifically permits litigation despite an arbitration clause but if the underlying transacion is in interstatae commerce, the FAA preempts; Giuliano v. Inland Empire Personnel, Inc., 149 Cal.App.4th 1276 (2007).

Administrative procedures: Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002); E.E.O.C. v. Waffle House, Inc., 534 U.S. 279 (2002). But see, Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000) [Bus. & Prof. 12900; FEHA];

Consumer Legal Remedies Act (CLRA; CC 1750) preempted, in part: Broughton v. Cigna Health Plans of Cal., 21 Cal.4th 1066 (1999) holds that public injunctive relief authorized by Civ. Code 1750 is not subject to arbitration. The federal court rule is to the contrary; Ting v. AT & T, 319 F.3d 1126 (2003) [CC 1750 preempted].

Limitation on remedies: Arkcom Digital Corp. v. Zerox Corp, 289 F.3d 536 (8th Cir. 2002);

Burden of proof: (to establish arbitrability) must comply with the federal standard, i. e., preponderance of the evidence (New York imposed a higher standard); Aceros Prefabricados, S.A. v. TradeArbed, Inc., 282 F.3d 92 (2d Cir. 2002);

NASD Rules: preempt California arbitrator disclosure rules; Jevne v. Sup.Ct., 35 Cal.4th 935 (2005) held that "conflict" preemption-not FAA preemption-voids California ethical rules for arbitrators in NASD cases. The Ninth Circuit has also ruled that in NASD cases the FAA preempts California law requiring arbitrator disclosure; Credit Suisse First Boston Corp. v. Grunwald, 400 F.3d 1119 (9th Cir. 2005);

Securities transactions: Strotz v. Dean Witter Reynolds, 223 Cal.App.3d 208(1990);

ERISA: In Aetna Health Inc. v. Davila, 124 S.Ct. 2488 (2004) the Supreme Court held that ERISA preempts state employee benefit plans under conflict preemption rather than under the FAA.

Examples of preemption denied:

Interstate Commerce: Absence of any evidence of transaction affecting interstate commerce between California homeowner and California contractor; Woolls v. Sup.Ct., 127 Cal.App.4th 197 (2005);

California procedural statutes for arbitration not preempted: Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2005); Rosenthal v. Grt. Western Fin. Secs. Corp., 14 Cal. 4th 394 (1996); Sanders v. Kinko's, 99 Cal. App.4th 1006 (2002);

Credit transactions: Credit Securities Act (CSA) is not preempted by the FAA; Mitchell v. Am. Fair Credit Assn., Inc., 99 Cal.App.4th 1345 (2002);

Insurance: McCarran-Ferguson Act, 15 U.S.C. 1012(b) exempts the "business of insurance" from the FAA but does not invalidate Cal. Health & Safety Code 1363.1 requiring "prominent" disclosure of arbitration clause; Malek v. Blue Cross of Cal.,121 Cal.App.4th 441 (2004); Zollezi v. Pacificare of Cal., 105 Cal.App.4th 573 (2003); Imbler v. Pacificare of Cal., 103 Cal.App.4th 567 (2002); Smith v. Pacificare Behavioral Health of Cal., 93 Cal.App.4th 139 (2002); Pagarigan v. Sup.Ct., 102 Cal.App.4th 1121 (2002); contra, Erickson v. Aetna Health Plans of Cal., 71 Cal.App.4th 646 (1999) [Medicare providers].

Cross Reference: Part I, Ch. II-K: McCarran-Ferguson Act

Consumer contracts not preempted: Discover Bank v. Sup.Ct., 36 Cal.4th 153 (2006) [class actions]; Guiterrez v. Autowest, Inc., 114 Cal.App.4th 77 (2004).

Note: Because a party can remove a state case to federal court (if diversity jurisdiction exists) different judicial interpretations of preemption doctrine occur. For example: Franchise venue limitation (Bus. & Prof. 2004.5) is not preempted in state court; Bolter v. Sup.Ct., 87 Cal.App.4th 900 (2001); preempted in Bradley v. Harris Research, Inc., 275 F.3d (9th Cir. 2001); Accord: KKW Enterprises v. Gloria Jean's Gourmet Coffees Corp., 184 F.3d 42 (1st Cir. 1999); Doctor's Assoc. v. Hamilton, 151 F.3d 157 (2d Cir. 1998).

CLRA not pre empted; Broughton v. Cigna Health Plans of Cal., 21 Cal.4th 1061 (1999); preempted in Ting v. AT & T, 319 F.3d 1126 (2003).

Comment: Although the vast majority of preemption doctrine applies to the FAA, the Supreme Court has also articulated the role of "conflict" preemption. If Congress unqualifiedly occupies the field, and state law conflicts, the Supremacy Clause overrides local legislation; Jevne v. Sup.Ct., 35 Cal.4th 935 (2005). See, next Section.

Cross Reference: Ch. IV-A: Doctrine of Preemption.

2. Conflict Preemption  [TOC]

In Jevne, above, the California Supreme Court framed preemption of state law in terms of "conflict" preemption. Under the Supremacy Clause of the U.S. Constitution, Article VI, state law that conflicts with federal law is preempted. Preemption can arise explicitly, or impliedly if Congress intends to occupy the field; or the legislation compels a party to violate one law or the other. Jevne holds that the NASD code of regulations conflicts with California disclosure standards for arbitrators and is preempted based on the "conflict" between the two jurisdictions.

Federal regulations have no less preemptive effect than federal statutes; First Fed. S & L Assn. v. de la Cuestra, 458 U.S. 142 (1982).

B. State Preemption   [TOC]

Arbitrators in state court must respect federal and state statutory provisions applicable to arbitration. State statutes in conflict with a CBA are preempted, and arbitrators who fail to apply statutory remedies in an award "exceed their powers"; Bd. of Education v. Round Valley Teachers Assn.,13 Cal.4th 269 (1996).

C. California Policy  [TOC]

California maintains a strong policy endorsing arbitration and consequently favors the enforcement of arbitration agreements; CCP 1281. "The Legislature has expressed a strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution. . . Courts will indulge every intendment to give effect to such proceedings;" Armendariz v. Foundation Heath Psychcare Services, Inc., 24 Cal.4th 83 (2000); A.M. Classic Construction Co., Inc. v. Tri-Build Dev. Co., 70 Cal.App.4th 1470 (1999).

In Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992) and Advanced Micro Devices, Inc. v. Intel Corp., 9 Cal.4th 362 (1994) the California Supreme Court reviewed the history of arbitration and confirmed a judicial policy validating an arbitration forum in lieu of litigation.

To reflect the Legislative intent offering arbitration as an uncomplicated alternative to litigation, the statutory admonition is spare but clear: ". . . all courts shall give [arbitration] preference over all civil actions or proceedings except older matters of the same character and matters to which special precedence may be given by law in the matter of setting the same for hearing and in hearing the same to the end that such proceedings shall be quickly heard and determined;" CCP 1291.2; Hedges v. Carrigan, 117 Cal.App. 4th 578 (2004.

Comment: Subsequent to this endorsement of arbitration, the California Supreme Court, and some Courts of Appeal, have modified this policy. The court has questioned the continued viability of its earlier policy, invoking the doctrine of "unconscionable" arbitration terms in a contract, or public policy objections, or citing inability of employees to vindicate statutory rights in arbitration: "Although we have spoken of a strong public policy of this state in favor of resolving disputes by arbitration, [CCP 1281] makes it clear that an arbitration agreement is to be rescinded on the same grounds as other contracts or contract terms. In this respect, arbitration agreements are neither favored nor disfavored, but simply placed on an equal footing with other contracts;" Armendariz. The U.S. Supreme Court has not followed this view; Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003).

D. Presumption of Arbitrability  [TOC]

Counsel who intend to challenge the enforcement of an arbitration clause in a contract confront a judicial presumption of arbitrability if the arbitration clause is ambiguous; Engalla v. Permanente Med. Grp., 15 Cal.4th 951 (1997). California law is similar to the FAA in its favor of the presumption of arbitrability; Ericksen, Arbuthnot, McCarthy & Walsh, Inc. v. 100 Oak St., 35 Cal.3d 312 (1983); Engalla.

Petitioner bears the burden of proving the existence of a valid arbitration agreement by a preponderance of the evidence and the opposition bears the burden of proving, by a preponderance of evidence, any fact necessary to its defense. The trial court sits as a trier of fact weighing all submitted evidence. No jury trial is required for this determination; Rosenthal v. Grt. Western Fin. Secs. Corp., 14 Cal. 4th 394 (1996).

Chapter XIV. Arbitration: Statutory Authority: State Court   [TOC]

Introduction

This Chapter lists the relevant statutes governing the process of arbitration and briefly reviews their content. Each of these subjects is discussed in more detail in successive Chapters.

A. Distinguishing Categories of Arbitration  [TOC]

The hallmarks of contractual arbitration pursuant to CCP 1280 et seq. are: a third party neutral decision maker, a fair procedural process, and a final binding award; Stirlen v. Supercuts, Inc., 51 Cal.App.4th 1519 (1997). "It is the general rule that parties to a private arbitration impliedly agree that the arbitrator's decision will be both binding and final." Moncharsh v. Heily & Blaise, 3 Cal.4th 1 (1992).

Although California courts have clearly distinguished between contractual arbitration and judicial arbitration (Mercury Ins. Grp. v. Sup.Ct., 19 Cal.4th 332 [1998]), attempts by counsel to create hybrid agreements between the two categories to resolve disputes continue to incur appellate impatience ("there is no such thing as binding arbitration with a right to appeal;" National Union Fire Ins. Co. v. Nationwide Ins. Co., 69 Cal.App.4th 709; Old Republic Insurance Co. v. St. Paul Fire & Marine Ins. Co., 45 Cal. App.4th 631 (1996).

Counsel can unquestionably tailor contractual arbitration governed by procedural and/or evidence rules of Judicial Arbitration (Old Republic Insurance Co.) but the final agreement must include a binding award, i.e, the "finality" lacking in judicial arbitration. The "binding" element is a structural aspect of contractual arbitration; Trabuco Highlands Comm. Assn. v. Head, 96 Cal.App.4th 2283 (2002).

Note: For an excellent summary of basic arbitration law, see McManus v. CBIC World Markets Corp., 109 Cal.App.4th 76 (2003).

The importance of determining whether the parties agreed to the category of alternative dispute resolution they contemplated cannot be overemphasized. The agreement may not necessarily qualify as a bona fide "arbitration" based merely on the label selected by the parties; Georgina Cheng-Canindin v. Renaissance Hotel Assocs., 50 Cal.App.4th 676 (1996). Inarticulate stipulations to arbitrate not clearly delineating the scope of arbitration implicate numerous other issues, i.e, costs; pre judgment and post award interest; CCP 998; attorney fees; Caro v. Smith, 59 Cal.App.4th 725 (1997).

A form of hybrid arbitration-bench trial creates crucial distinctions between judicial and arbitrator powers; Elliot & Van Eyk Partnership v. City of Long Beach, 57 Cal.App.4th 495 (1997). Other ADR processes may also cause confusion. For example: The CCP authorizes the court to appoint Referees to resolve issues of fact in litigation and issue a statement of decision (CCP 638). The parties in litigation must apply to the court to confirm their mutual agreement to a Referee (CRC 2.830)or request the court to do so; CCP 638; CRC 2.810. These code sections require a "pending action;" Trend Homes, Inc. v. Sup.Ct., 131 Cal.App.4th 950 (2005). Or, if parties agree to resolve the case with a Temporary Judge pursuant to Article VI, Section 21 of the California Constitution, the court must appoint the judicial officer who holds, in effect, a court trial subject to rules of evidence and appeal; CRC 2.810; 2.830 and Local Superior Court Rules.

There is no such category as "binding mediation;" Lindsay v. Lewandowski, 139 Cal.App.4th 1618 (2006). According to the court, the bright line between mediation and arbitration is the "binding" nature of the process. Mediation is voluntary, ineffectual if the parties cannot agree and occurs in a "facilitative" process; CRC Rules emphasize voluntariness; CRC 3.853. Arbitration is adversarial, resulting in a final and binding decision; CRC 3.850.

Examples of cases mixing ADR processes:

Contractual Arbitration: elements: Georgina Cheng-Canindin v. Renaissance Hotel Assocs., 50 Cal.App.4th 676 (1996);

Contractual Arbitration and Referees: Sy First Family Limited Partnership v. Cheung, 70 Cal.App.4th 1334 (1999); Old Republic Ins. Co. v. St. Paul Fire & Marine Ins. Co.; National Union Fire Ins. Co. of Pittsburgh v. Nationwide Insurance Co., 69 Cal.App.4th 709 (1999);

Sitting judges and arbitration: Heenan v. Sobati, 96 Cal.App.4th 995 (2002) ["judicial binding arbitration"]; Housing Group v. United Nat'l. Ins. Co., 90 Cal.App.4th 1106 (2001);

Article VI, Section 21 judges and arbitration: In re Marriage of Assemi, 7 Cal.4th 896 (1994); Estate of Fain, 75 Cal.App.4th 973 (2000); City of Shasta Lake v. County of Shasta, 75 Cal.App.4th 1 (1999);

Appeal: Platt v. Gursey, Schneider & Co., 80 Cal.App.4th 1105 (2000).

Practice: In determining whether to elect arbitration, counsel must obtain authority from the client to surrender the right to a judicial forum, explain the "finality" of arbitration and the right to limited appeal. Absent this advice, unless the client ratifies an unauthorized election of arbitration, the award is potentially jeopardized; Blanton v. Womencare, 38 Cal.3d 396 (1985); Caro v. Smith, 59 Cal.App.4th 725 (1997).

B. Arbitration Defined  [TOC]

The California statute does not define "arbitration", referring instead to an "agreement" in writing, but the term includes valuations, appraisals and agreements between employers and employees; CCP 1280(a) et seq. As judicially defined, it is "a process of dispute resolution conducted by a neutral third party (arbitrator) at the request of the parties (or appointed by the court in the absence of their agreement) and who renders a binding decision after a hearing at which all parties are heard;" Georgina Cheng-Canindin v. Renaissance Hotel Assocs., 50 Cal.App.4th 676 (1996); Saeta v. Sup.Ct., 117 Cal.App.4th 261 (2004). Merely characterizing a dispute resolution mechanism as an "arbitration" does not end the inquiry. The test invoked in Cheng-Canindin for determining whether the parties have agreed to "arbitration" is determined by the following attributes:

A mechanism for ensuring neutrality in decision making; A third party decision maker chosen by the parties or court appointed;

An opportunity for both parties to be heard;

A binding decision; Moncharsh v. Heily & Blaise, 3 Cal.4th 1 (1992); American Fed. of St., Co. & Municipal Employees v. MWD of So. Cal., 126 Cal.App.4th 247 (2005); Coopers & Lybrand v. Sup. Ct., 212 Cal.App.3d 524 (1989); Trabuco Highlands C.A. v. Head, 96 Cal.App.4th 1183 (2002);

Finality of decision: Arbitral finality is the core concept of arbitration; Moncharsh v. Heilly & Blase, 3 Cal.4th 41 (1992); Cheng-Canindin; American Fed. of St., Co. & Municipal Employees.

That a procedure is labeled an "arbitration" is not determinative, the issue is the nature and intended effect of the proceeding. And, a procedure may qualify as an arbitration even though the process does not reflect that characterization; Elliott & Ten Eyck Partnership v. City of Long Beach, 57 Cal.App.4th 495 (1997). And, arbitration is a matter of contract and the parties may select non-legally trained individuals and that person may not even be neutral; In Chun Lee v. Elghanayan, 2008 WL 3906848 (Cal.App.) [Non.Pub. Non. Cite).

Note: Chun Lee, not published, cites several old California  cases as authority and should carefully be considered under amendments to the arbitrataon statutes; CCP 1280, et.seq.  According to Chun Lee, New York law is in accord; Siegel v. Lewis, 40 N.Y.2d 687 (1976).   

For an example of a court distinguishing a "settlement" from an "arbitration", see, Sheppard, Mullin, Richter & Hampton v. Sup.Ct., 2006 WL 1738160 (Cal.App.) [Non.Cite.]; Bank of Orange Co. v. Azar, 2007 WL 521893 [Cal.App. Non.Cite].

C. Statutory Requirements  [TOC]

CCP 1281 et seq. sets forth the statutory basis for arbitration: "A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for revocation of any contract." California permits arbitration of a "controversy"-not a "suit" as required by the FAA-whether existing or "thereafter arising-", but the scope of coverage is essentially the same in either context. In California, parties can agree in writing to arbitrate torts (usually after the fact) as well as contracts or other disputes without filing litigation; CCP 1281.

CCP 1280 defines the requirements, extent and scope of arbitrable disputes:

1. Written Agreement  [TOC]

This term includes "written" agreements extended or renewed by an oral or implied agreement; CCP 1280(f). The court may enforce an oral agreement to arbitrate when the parties proceeded as if a formal writing was unnecessary to its enforcement (evidence of waiver or estoppel); Law Offices of Ian Herzog v. Law Offices of Joseph M. Frederics, 66 Cal.App.4th 672 (1998); Magness Petroleum Co. v. Warren Resources of Cal., Inc., 103 Cal.App.4th 901 (2002) [oral "modification" of written agreement unenforceable]. (Written) "agreement" includes valuations, appraisals, and similar proceedings, and agreements between employers and employees or between their respective representatives; CCP 1280(a).

Arbitration clauses validate and enforce written agreements between parties who agree to resolve existing controversies, or those "thereafter arising" (Bos Material Handling, Inc. v. Crown Controls Corp., 137 Cal.App 3d 99 ([1983]); Ericksen, et al. v. 100 Oak St., 35 Cal.3d 312 [1982]) unless grounds "exist for the revocation [rescission] of any contract;" CCP 1280 et seq. The "grounds" are the subject of substantive State contract law.

2. "Controversy" Required  [TOC]

A "controversy" is any disputed question arising between the parties to an agreement whether of law or fact or both; CCP 1280(c).

3. "Parties" Defined  [TOC]

"Parties" include anyone who seeks to arbitrate a controversy pursuant to the agreement; or one against whom arbitration is sought. A third party may seek joinder in the arbitration from the arbitrator; or a party to the arbitration may seek joinder; or the neutral arbitrator may independently join a third party; CCP 1280(e).

Practice: Little case law exists on the statutory authority of an arbitrator to join a third party. If the court has ordered the parties to arbitration, preparation by counsel may uncover an unknown party whose interests are directly affected by the award. Presumably a noticed motion to the arbitrator to join the third party is required.

Comment: Obtaining a client's consent to arbitration is mandatory. A client who agrees to arbitrate and subsequently revokes the stipulation commits an ineffective act if not communicated to the other party prior to acceptance of an offer to stipulate to arbitration; CPI Builders, Inc. v. Impco Techs, Inc., 94 Cal.App.4th 1167 (2001).

4. Appraisals  [TOC]

An appraisal is considered an arbitration under California law; CCP 1280.

D. Order to Arbitrate  [TOC]

If a party refuses to arbitrate, the court will order arbitration and, if the moving party seeks an order to stay of pending action, stay any litigation on file except on the following grounds:

1. Waiver  [TOC]

The right to arbitration has been waived by petitioner; CCP 1282. 2 (a); See, Ch. XVI-H;

2. Revocation of Arbitration Clause[TOC]

Grounds exist for revocation of the agreement; CCP 1282. 2 (b); See, Ch. XVII;

3. Third Parties  [TOC]

A party to the agreement is also a party to a pending court action with a third party arising out of the same transaction and a possibility of conflicting rulings on common issue of law or fact exist; CCP 1281.2 (c); See, Ch. XVI-F. In this event, the court has several options as discussed in Ch. XVI-F.

4. Stay of Arbitration.   [TOC]

Grounds to Stay: Issues exist between the parties not subject to arbitration but the subject of a pending action or special proceeding between the parties, and that determination of those issues makes the arbitration unnecessary; CCP 1281.2.(c). See, Ch. XVI-F.

Research: These headings are discussed in more detail in the Chapters listed. The leading case is Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 ( 2005).

After granting the petition to compel arbitration, the trial court retains only vestigial jurisdiction over matters submitted to arbitration, i.e., to determine the arbitral award on the merits; whether to dismiss the action at law or rule on any subsequent petition filed by the parties regarding the agreement or controversy; issue provisional relief; appoint an arbitrator; confirm, correct or vacate an award; Brock v. Kaiser Foundation Hospitals, 10 Cal.App.4th 1790 (1992).

Practice: The order referring the action to arbitration should be specific as to the issues referred. The moving party should prepare this order without accepting "notice waived." The notice should track the order. The arbitrator is limited not only by the arbitration agreement but also the scope of the order compelling arbitration; Malek v. Blue Cross of California,121 Cal.App.4th 44 ( 2004).

Note: CCP 1281.8 permits the parties to seek injunctive relief during the course of, or prior to, commencement of the arbitration if the arbitral result would be rendered ineffective. The law is uncertain whether an arbitrator can issue a TRO or injunctive relief under this Section. The court could also intervene to resolve a motion to disqualify the arbitrator; CCP 1281.9. See, Provisional Remedies, Ch. XVII-E-3.

Cross Reference: The FAA (9 U.S.C. 1-16) contain no comparable statute permitting provisional relief for parties during an arbitration. Comedy Club, Inc. v. Improv West Associates, 502 F.3d 1100 (9th Cir. 2007). [Cert.Gtrd.and vacated based on Hall Street Assocs. L.L.C. v. Mattel, Inc.,128 S.Ct. 1286 (2008).  On remand, no change in judgment; Comedy Club, 553 F.3d 1277 (9th Cir. 2009).

E. Stay of Litigation  [TOC]

If the court orders arbitration of a pending action, and no non-arbitrable issue[s] is involved, a stay of litigation is not self executing. The moving party must file and serve a motion to stay the litigation; Dial 800 v. Fesbinder, 118 Cal.App.4th 32 (2004). If a party has previously petitioned for an order to arbitrate, but resolution judicially undetermined, the court must stay any action until the earlier petition is resolved; CCP 1281.4; Heritage Provider Network, Inc.v. Sup.Ct., 158 Cal.App.4the 1146 (2008); Federal Ins. Co. v. Sup. Ct., 60 Cal.App.4th 1370 (1998). The court may sever the arbitrable issue from the order to stay litigation; CCP 1281.4; Madden v. Kaiser Fourndation Hospitals 17 Cal.3d 699 (1976).

The purpose of the stay is to protect the jurisdiction of the arbitrator by preserving the status quo until arbitration is resolved; Federal Ins. Co. A stay of the entire action is appropriate when, in its absence, continuation of proceedings in the trial court "[would] [disrupt] arbitration and render them ineffective;" Cruz v. Pacificare Health Systems, Inc., 30 Cal.4th 303 (2003).

An order denying arbitration is appealable as the functional equivalent of an order staying arbitration; Henry v. Alcove Inv., Inc., 233 Cal.App.3d (1991).

A plaintiff may join non-parties to the arbitration agreement who are not entitled to arbitration but joinder does not affect arbitration with the party who does have the arbitration agreement. The court may sever parties or limit any stay to those issues subject to arbitration; Madden v. Kaiser Found. Hospitals, 17 Cal.3d 699 (1976).

Practice: When arbitration is compelled, legal proceedings are not automatically stayed or dismissed; Ross v. Blanchard, 251 Cal.App.2d 739 (1967). The action is stayed only when a party moves for an order. If the court orders arbitration of issues in a pending action, the moving party must also stay the action until the arbitration is completed; CCP 1281.4. Heritage Provider Network, Inc. v. Sup.Ct., 158 Cal.App.4th 1146 (2008).

See, Ch. XVII.

Note: CRC 3.900 requires both parties to give notice of the stay.  A motion to stay should be made in the court where the action is pending; CCP 1292.8.

F. Appeal from Order to Arbitrate   [TOC]

Appealable orders require “finality” and no appeal lies from an interlocutory order compelling arbitration or staying litigation; CCP 1294. Despite this statute, California courts have allowed mandate if the issue at the hearing to compel arbitration is a question of law;  Vivid Video, Inc. v. Playboy Entertainment Grps., 147 Cal.App,a4th 434 (2007) [collecting cases]; Morehart v. Sup. Ct., 7 Cal.App.4th 725 (1994). See, this Chapter; Mandate, XIV-J.

Athough an order compelling arbitration is not appealable, an order requiring a party to pay money or perform some other act is a final determination of a collateral matter and severable from the litigation; Lachkar v. Lachkar 182 Cal.App. 3d 641 (1986); Hale v. Jowett, 2005 WL 2303999 (Cal.App.) [Non.Cite.].

G. Appeal from Order Denying Arbitration   [TOC]

A party may appeal from an (interlocutory) order dismissing or denying a petition to arbitrate (CCP 1294)[a]) and, upon motion of the moving party to stay litigation, all further trial court proceedings are stayed; Varian Med. Systems, Inc. v. Delfino, 35 Cal.4th 180 (2005); Prudential-Bache Secs. v. Sup.Ct., 201 Cal. App.3d 924 (1998).

If no extrinsic evidence is offered at the hearing, review is de novo. If the trial court considers conflicting evidence, review is for "substantial evidence." Failure to raise an issue on appeal, even if asserted in the trial court, constitutes a waiver; Alliance Title Co. Inc. v. Boucher, 127 Cal.App.4th 262 (2005). See, Ch. XXII, Appeal, for further discussion.

Practice: As noted, a petition to compel arbitration should be accompanied by a motion to stay the underlying civil action. In Muao v. Grosvenor Props., 99 Cal.App.4th 1085 (2002) the trial court dismissed the action and the Court of Appeal held an order dismissing the action inappropriate. The correct order is to compel arbitration and stay litigation.

H. Severance of Non Arbitrable Issues  [TOC]

If an arbitrable issue is severable from other non arbitrable issues in the litigation, the court is empowered to sever the arbitrable issue(s); CCP 1281.4; Broughton v. Cigna Health Plans of Cal., 12 Cal.4th 1667 (1999);  Heritage Provider Network, Inc. v. Sup.Ct., 158 Cal.App.4th 1146 (2008).

See, Procedural Law & Arbitrability, Ch. XVII-B.

Practice: The issue of mixed arbitrable and non-arbitrable claims is vexing. Arbitration clauses do not always include all claims subject to arbitration, or may exclude certain claims. In most cases, the award in arbitration resolves the stayed litigation, but if not, non-arbitrable issues are subject to litigation. CCP 1282(c) allows the court discretion to stay litigation, stay arbitration or join parties in response to a petition to compel arbitraion; Cronus Invs. v. Concierge Services, 35 Cal.4th 376 (2005).

In Cronus, multiple parties were involved in a dispute but not all had signed contracts containing arbitration clauses. The California Supreme Court, citing Volt Information Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 493 U.S. 871 (1989) held CCP 1282 (c) did not inhibit arbitration and enabled the parties to avoid conflicting results.

In addition, the arbitration clause contained a term invoking FAA rules. Several Courts of Appeal have reached conflicting results on the choice of law clause.

See, Choice of Law Clause, Ch. XVII-B-5. The court in Cronus also held that the use FAA rules prescribed in an arbitration clause do not preempt California procedural law.

Because there are "claims" in arbitration instead of causes of action, and the award may not articulate the reasons for the decision, the court's ability to identify the issues subject to collateral estoppel or res judicata is difficult to identify either at a subsequent hearing to compel arbitration in another case or a motion to confirm an award.

I. Appeal of Other Orders  [TOC]

CCP 1294 lists other appealable orders. See, Appeal, Ch. XX.

J. Mandate   [TOC]

Although an appeal from an interlocutory order granting a petition to compel arbitration is prohibited by the CCP 1294 providing for appealable orders, mandate has been invoked to avoid this restriction; Morehart v. County of Santa Barbara, 7 Cal.4th 725 (1994); Wheeler v. St. Joseph Hospital, 63 Cal.App.3d 345 (1976). Ordinarily, an appeal lies only from an interlocutory order denying a petition to compel arbitration (CCP 1294), but the appellate court may review an order granting a petition to compel arbitration if the issues subject to arbitration fall outside the scope of the arbitration agreement; St. Farm Mut. Auto Ins. Co. v. Sup.Ct, 123 Cal.App.4th 1424 (2004); Atlas Plastering, Inc. v. Sup.Ct., 72 Cal.App.3d 63 (1977); Vivid Video v. Playboy Enterprises, 147 Cal.App.4th 434 (2007) [“arbitrability”].

The California Supreme Court left the door open for mandate if there are "unusual circumstances, particularly if the issue of appealability is unclear;" Olson v. Cory, 35 Cal.3d 390 (1983). For an example of this principle, see, Sheppard, Mullin, Richter & Hampton v. Sup.Ct., 2006 WL 1738160 (Cal.App.) [Non.Cite.]. The court in Mid-Wilshire Assoc. v. O' Leary, 7 Cal.App.4th 1450 (1992) disdained to permit mandate except in unusual circumstances particularly when the statute provides for appellate review.

Statutory authority for mandate is expressed in CCP 1084 and authorized in CCP 1086: "when the petitioner has no other plain, speedy, and adequate remedy, in the ordinary course of law." The clearest expression of the use of mandate appears in Mid-Wilshire Assoc. v. O' Leary, above.  A party must also compy with CRC 8.490.

Muao v. Grosvenor Properties, 99 Cal.App.4th 1085 (2002) held that an order compelling arbitration is reviewed on appeal from a judgment entered after arbitration is completed, or in exceptional circumstances, by writ of mandate. No specific statutory authority exists for seeking mandate to reverse an order granting a petition to compel arbitration despite the contrary intent of the Legislature to deny the right to appeal an order granting arbitration.

Decisional law emanates from Lesser Towers, Inc. v. Roscoe-Ajax Const. Co., 271 Cal.App.2d 675 (1969). Subsequent court decisions have issued mandate for cases asserting that parties or issues lay outside the scope of the arbitration clause; CCP 1084. Utlizing this exception, although ignoring its application to the facts, the court in Zembsch v. Sup.Ct.., 146 Cal.App.4th 153 (2006) granted the writ proceeding.

Although numerous courts have entertained writs applying this judicially invented exception (Banner Enterprises, Inc. v. Sup.Ct., 62 Cal.App.4th 348 [1998]); Medeiros v. Sup.Ct., 146 Cal.App.4th 1008 [2007]), in Parker v. McCaw, 125 Cal.App.4th 1494 (2005) the parties could have avoided enormous costs of an arbitration (which now must be re-arbitrated after reversal by the Court of Appeal) by seeking a writ of mandate. Failure to do so, according to the Parker court, did not preclude appellate review of pre-arbitration orders.

K. Priority of Arbitration  [TOC]

California affords calendar priority to arbitration over litigation; CCP 1291.2. CCP 1281.4 permits the court to stay pending civil actions involving similar issues previously ordered into arbitration. The stay remains until the earlier arbitration is completed. This authority extends even if an application is pending in another proceeding while the court determines whether to order arbitration; Heritage Provider Network, Inc. v. Sup.Ct., 158 Cal.App.4th 1146 (2008).

L. Labor Arbitration  [TOC]

                        1. Preemption  [TOC]

As noted earlier (Ch. XIII-A-1), federal  law substantially preempts state arbitration of employment disputes in interstate commerce if the employee alleges violation of Labor Code 229 [due & unpaid wages] and does not plead any statutory violation, i.e., FEHA; Giuliano v. Inland Empire Personnel, Inc., 149 Cal.App.4th 1276 (2007) [Labor Code 229 preempted].

Cross Reference: Allied-Bruce Terminix Cos.v. Dobson, 513 U.S. 265 (1995); cf., Hill v. Rent-A-Center, Inc. 398 F.3d 1286 (11th Cir. 2005).

                        2.  Statutory Claims  [TOC]

CCP 1280(a) permits arbitration of employer/employee disputes in CBAs. Flores v. Axxis Network & Telecommunications, Inc., 173 Cal.App.4th 802 (2009) holds that employees working under a collective bargaining agreement cannot be compelled to arbitrate state statutory claims (labor code; FEHA) unless the CBA expressly waives their right to judicial forum.  Flores essentially adopts the federal rule in Wright v. Universal Maritime Service. Corp., 525 U.S. 70 (1998). 

3. Public Employees  [TOC]

Government employers excluded from coverage under the LMRA are governed by California law and CCP 1281.2; American Fed. of St., Co. & Municipal Employees v. MWD, 126 Cal.App.4th 247 (2005); Napa Assn. of Public Employees v. Co. of Napa, 98 Cal.App.3d 263 (1979).

Traditional mandate is applicable to public employees (CCP 1094.5) and is the standard for review; American Fed.; CCP 1094.5

M. Costs of Arbitration  [TOC]

1. General Rule  [TOC]

In the absence of an agreement or an arbitration clause to the contrary, each party bears their pro rata fees and expenses of the neutral arbitrator and other expenses of the arbitration incurred by the parties or approved by the arbitrator, not including expenses of counsel or witness fees incurred by the parties for their own benefit; CCP 1284.2.

Although this statute creates no exceptions, the California Supreme Court decision in Armendariz v. Foundation Health Psychcare Services, 24 Cal.4th 83 (2000) held that in employment litigation the employer must bear all non-litigation costs in order to avoid an unconscionable-and unenforceable-arbitration clause. Silence about costs in an arbitration agreement is not grounds for denying a petition to compel arbitration. In enforcing an award, the court can address this issue; Armendariz.

Except for Armendariz cost shifting, an arbitration agreement silent on the issue of costs is subject to Civ. Code 1717 establishing mutuality of remedy in a contract containing a prevailing party attorney fees clause.

Note: Cost shifting in Armendariz does not apply in all categories of litigation. Consumers are not entitled to cost shifting unless indigent, in which case the fees and costs are shifted to the non-consumer; CCP 1284.3 (a); Boghos v. Certain Underwriters at Lloyd's of London., 36 Cal.4th 495 (2005); Cruz v. Pacificare Health Systems, Inc., 30 Cal.4th 303 (2003); Gutierrez v. Autowest, Inc., 114 Cal.App.4th 77 (2003).

Comment: The Ninth Circuit has held an arbitration clause in a contract requiring consumers to split arbitration fees unconscionable; Ting v. AT & T, 319 F.3d 1126 (9th Cir. 2003); Greenbriar Homes Communities, Inc. v. Sup.Ct., 117 Cal.App.4th 337 (2004) specifically rejects this rule.

Note: In arbitration of medical malpractice, the Legislature has statutorily precluded these contracts from a judicial finding of adhesion; CCP 1295. This statute presumably prohibits cost shifting.

A party engaging in dilatory tactics may be subject to costs and the cost-sharing of CCP 1284.4 is inapplicable; Turner v. Sup.Ct., 67 Cal.App.4th 1432 (1998). In Turner, the court refused to apply this statute in the absence of a showing of plaintiff's financial hardship.

See, Costs and Fees discussed in Procedural Law & Arbitrability, Ch. XVII-B-10;

2. Health Care Plans  [TOC]

H & S 1373.20 applies to costs incurred in health care plans which do not use professional arbitration service providers.

N. Representation by Counsel  [TOC]

CCP 1282.4 enforces the statutory right of a party to be represented by counsel although a waiver of this right may be revoked.

The statute lists an extensive number of qualifications mandatory for an out-of-state lawyer representing a party in an arbitration hearing or procedure.  The list is exhaustive and should be read by any lawyer appearing in an arbitration hearing.

O.  Drafting Arbitration Clauses [TOC]

Suggestions for drafting arbitration clauses are listed in Part I, Ch. III-B-15 and are repeated  here for the convenience of readers.

Practice: Arbitration is a matter of contract.  Here is a sample of a comprehensive arbitration clause to resolve disputes: “any controversy, dispute or claims under, arising out of, in connection with or in relating to this  agreement, including the negotiation, interpretation, construction, coverage, scope, performance, non-performance, breach, termination, validity or enforceability of this agreement.”

Here is another: “All disputes and controversies of every kind and nature whatsoever between [the parties) arising out of or in connection with or under any contract between [the parties] as to the existence of such contract, its execution ,validity, the right of either party to avoid the same on any ground, its construction, performance, non-performance, operation, breach, continuance or termination, shall be submitted to arbitration regardless or whether either party has terminated or purported to terminate the same.”

Neither the FAA nor the CAA set forth the terms of an enfoceable arbitration clause in the contract. After all, arbitration is a matter of contract and the parties can negotiate their own terms.   In adhesive contracts, the terms are seldom negotiable

Subjects for discussion in drafting agreements include:

Whether to arbitrate under the CAA or the FAA;

Selection of a choice of law;

Whether the choice of law includes substantive and/or procedural law;

Selection of a forum (venue) to conduct the arbitration;

Use of the Rules of an arbitration service provider.  Many providers have drafted industry specific rules or general rules for the conduct of proceedings;

Arbitrator vacancy.  Provide for replacement in the event the arbitrator dies, becomes  injured or is otherwise unavailable;

Notice to arbitrate and service of notice;

The scope of the arbitration clause, either broad or narrow;

The parties and their legal capacity;

Extent of discovery (particularly in employment and consumer cases).  Other than personal injury and wrongful death cases, the CCP allows no discovery unless the parties agree; CCP 1283.05; 1283.1.  A clause informing the parties are giving up [their] judicial rights to discovery refers to rights in civil actions not the more limited rights of CCP 1283.05: Rodgers v. Homes, 2008 WL 2568482 (Cal.App.) [Non.Cite.]

Whether to provide for appeal under the auspices of an arbitration service provider;

Whether to include a severance clause of any terms held unenforceable;

Whether to require “negotiations” (meet & confer) prior to arbitration, noting the vagueness of this term;

Whether to require mediation prior to arbitration (Ev. Code 1115-1128; CRC 3.850) and impose penalties for non compliance;

Whether to include any  conditions precedent to arbitration;

Whether to include any administrative remedies as a condition precedent;

Remedies awardable to the prevailing party.  The clause must enable a claimant to vindicate statutory rights and remedies, but adhesive contracts are subject to court imposed limitations.  The Remedies clause can be broadly written to include all “remedies under California statutory and common law.” An equitable remedy, i.e., an injunction is judicially authorized by CCP 1281.8 under statutory limits.  Note that the FAA does not provide comparable relief; Comedy Club, Inc. v. Improv West Associates, 502 F.3d 1100 (9th Cir. 2007). [Cert.Gtrd.and reversed based on Hall Street Assocs. v. Mattel, Inc., 128 S.Ct. 1286 (2008)].   On remand, no change in judgment; Comedy Club, 553 F.3d 1277 (9th Cir. 2009).

Costs, fees, pre and post judgment interest.

Consult the CRC and the local Superior Court Rules.

Award:  require the arbitrator to issue a “reasoned” award (mandatory in employment cases) or a “bare” award.  Consider the potential of future disputes between the parties and the effect of res judicata and collateral estoppel on the effect of the award;

Arbitrator: a single arbitrator or a panel? The parties can self-select one of the panelists (party arbitrators), select independently, or select from an arbitration service provider panel;

Note that some categories of disputes are governed by specific statutes in cases removed from state courts if the alleged breach is of a contract performed in interstate commerce.

Note: Arbitration Service Provider Rules, decisional law and statutory provisions (CCP 1281.9 applicable to employment, consumer and franchise agreements should be consulted in these categories. Although the parties may commence litigation in state court, the other party may remove to federal court on grounds of diversity if the transaction is in interstate commerce and the plaintiff alleges claims in excess of the $75,000.00 minimum for jurisdiction.

Comment: Counsel have attempted to expand appellate jurisdiction of a federal court or, in some cases, to restrict it. Circuit Courts of Appeal are conflicted on this topic. See, Ch. V, Awards; Ch. 6-A-1, Appeal. Hall Street Associates, LLC v. Mattel, Inc., 128 S.Ct. 1396 (2008);Kyocera Corp. v. Prudenial-Bache, 341 F.3d 884 (9th Cir. 2003) holds that the parties cannot expand appellate jurisdiction.

Cross Reference:   California does not apply the Ninth Circuit rule; Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4th 1334 (2008). 
See, Awards, Ch. XXI.

Chapter XV. Initiating Arbitration: State Court  [TOC]

A. Self-Executing Arbitration Clause  [TOC]

The parties to a pre-dispute arbitration clause, or subsequently agreed upon clause, can initiate arbitration without court intervention and no court order is necessary; Mitchum, et al. v. Chronis, 72 Cal.App.3d 596 (1977); Infogroup Ltd. v. Core Wealth Management Co., LLC, 2006 WL 2361545 (Cal.App.) [Non.Cite.]. If the clause  incorporates an arbitrator service provider Rules, these rules will govern and arbitration is not necessarily controlled by the CCP unless expressly provided by the Code, by arbitration rules, i.e., CRC, by the terms of the contract or other provisions of law regulating such nonjudical arbitration or decisional law; Paramount Unified School District v. Teachers Assn. of Paramount, 26 Cal.App.4th 1371 (1994).

Note:  Despite the CCP, disputes involving employment, consumer, franchise and real esstate contracts adhesive in nature are governed by decisional law; See, Ch. XVII-C-3; 4.  Medical Services contracts (CCP 1295) are statutorily governed; See, XVII-C-5-d.

B. Petition to Compel Arbitration   [TOC]

A petition to compel arbitration is essentially a suit in equity to compel specific performance of an agreement, and any civil action at law has no direct effect on contractual arbitration proceedings; Engalla v. Permanente Medical Grp., Inc., 15 Cal.4th 951 (1997); Freeman v. State Farm Mut. Auto. Ins. Co., 14 Cal.3d 473 (1975); CCP 1281.7; Brock v. Kaiser Foundation Hospitals, 10 Cal.App.4th 1790 (1992).

CCP 1281.2 provides: "On petition of a party to an arbitration agreement alleging existence of a written agreement to arbitrate a controversy and that a party thereafter refuses to arbitrate such controversy, the court shall order [the parties] to arbitrate."

If the party refusing or failing to arbitrate (usually the Plaintiff) has filed a civil action, the opposing party should not demur or file a motion for summary judgment to request arbitration (Badgley v. Van Upp, 20 Cal. App.4th 218 (1993) unless the only litigable issue is the arbitration clause; Charles Rounds Co. v. Joint Council of Teamsters No.42, 4 Cal.3d 888 (1996); 24 Hour Fitness v. Sup.Ct., 66 Cal.App. 4th 1199 (1998). St. Agnes Med. Ctr. v. PacifiCare of Cal., 31 Cal.4th 1187 (2003) distinguishes this ruling if non arbitrable claims are filed; Kalai v. Gray, 109 Cal.App.4th 7687 (2003).

If no litigation has been filed, the statute does not require a party to demand arbitration  (Meyerman v. Burgess, 2006 WL 1682727 (Cal.App.) [Non.Cite.] although the arbitration clause will presumably provide for “notice.” Courtesy to counsel suggests initially writing a letter referencing the arbitration clause and demanding arbitration pursuant to the agreement.

1. Filing Petition to Compel   [TOC]

If no litigation is on file, the party seeking arbitration can file a petition to compel arbitration in court if a party refuses to arbitrate; CCP 1290.1. Authentication of the document is not required and does not need to be entered into evidence; Condee v. Longwood Mgmt. Co., 88 Cal. App.4th 215 (2001). A petition to compel arbitration is a form of pleading and should contain allegations supporting the relief sought; the provisions of the written agreement and the paragraph providing for arbitration; CCP 1290. The provisions should be set forth verbatum or by copy attached to the petition and incorporated by reference; CRC 3.1330; Martin v. California College San Diego, 2006 WL 1491947 (Cal.App.) [Non.Cite.].

Practice: Revised CRC 3.1330 sets forth these requirements. Factual issues on motions are submitted in affidavits or declarations (or oral testimony in the discretion of the court accompanied by points and authorities).  Admissions gleaned from pleadings or other documentary evidence are also admissible.

If litigation has been filed, the opposing party can file a petition to compel arbitration and seek an order staying litigation; CCP 1281.2.  Accompanying the petition is statutory "notice", a document informing another of some fact or event, i.e., the filing of the petition and the date on which it will be heard. A civil action alleging mixed arbitrable and non-arbitrable claims requires a petition to compel arbitration in order to afford a court the opportunity to allocate arbitration and litigation claims; St. Agnes Med. Ctr. v. Pacificare of Cal., 31 Cal. 4th 1187 (2003).

Practice: In the absence of any designation of an arbitrator, or arbitration service provider, the petition to compel arbitration can be accompanied by a petition to appoint an arbitrator. Of course the moving party may not know whether a petition to compel arbitration will succeed, or, may want to delay selection of an arbitrator contingent on the outcome of the hearing.

Note: Declaratory Relief

In Ball v. FleetBoston Financial Corp., 164 Cal.App.4th 794 (2008) the plaintiff filed a declaratory relief cause of action (CCP 1060) challenging the arbitration clause in a credit card contract on grounds of unconscionability.  The Consumer Legal Remedies Act (CRLA;CC 1770)  statutorily provides grounds to file a Complaint alleging a consumer contract containing an unconscionable arbitration clause.  Is this an end run around the statutory grounds for filing a petition to compel arbitration (CCP 1280 et.seq.)? The court held  the CRLA does not apply to credit card transactions nor can the plaintiff obtain a remedy under the declaratory relief statute.  The California Supreme Court has agreed and in Meyer v. Sprint Spectrum L.P., 45 Cal.4th 634 (2009) held that in the absence of a dispute resulting in damage to the plaintiff, a declaratory relief cause of action is not viable to challenge an arbitration clause on grounds the remedies are unconscionable. In California a party files a petition to compel arbitration whether litigation is on file or not.  In federal court, when litigation is on file, a party files declaratory relief seeking an order to arbitrate. If no litigation is on file in federal court the moving party must first establish jurisdiction, usually by diversity of the parties, then file an action for  declaratory relief or summary judgment .   

2. Standing  [TOC]

The petition should set forth the written agreement and arbitration provision verbatum, or incorporated by reference, to also assist the court in determining contractual "standing"; City of Hope v. Bryan Cave, L.L.P., 102 Cal.App.4th 1356 (2002); CRC 371. "Standing" is essential if non-signatory third parties are claiming enforcement of the petition. In Meyer v. Sprint Spectrum L..P., 45 Cal.4th 634 (2009), the California Supreme Court denied “standing” to the plaintiff seeking declaratory relief in a consumer Complaint failing to allege damages, a dispute or an inability to vindicate statutory rights.

Derivative actions, brought not in the name of an individual but an entity, can sue the officers, directors and third parties to enforce a cause of action.  Shareholders in a corporation or members of an LLC can sue derivatively; Denevi v. LGCC, LLC, 121 Cal.App. 4th 1211 (2004). Accordinly, members of an LLC can file a petition to compel arbitration alleging derivative status; Oveido v. Grace, 2007 WL 316519 (Cal.App.) [Non. Cite.].

Determining “standing” by reviewing the pleadings in Birl v. Heritage Care, LLC, 172 Cal.App.4th 1313 (2009) enabled multiple plaintiffs (wife and daughter ) to avoid an arbitration clause in one contract.  The spouse of the deceased alleged her “standing” as a “successor in interest (CCP 377.11); wrongful death (CCP 377.60) and negligent infliction of  emotional distress.”   These pleadings enabled them to establish they were “third parties ” as  defined in CCP 1281 2.( c) and avoided arbitration.

Note: Distinguish contractual "standing", i.e., to assert a right and seek a remedy, from legal "capacity" to sue, and  a party who lacks "mental capacity" to execute a contract; Primerica Life Ins. Co. v. Brown, 304 F. 3d 469 (5th Cir. 2002).  As Berg v. Taylor, 148 Cal.App.4th 809 (2007) points out, the court must appoint a guardian ad litem for the minor, whether in litigation or in arbitration, at least where a conflict of interest exists between the parent and child under the age of 18.

A non-signatory to the contract must establish the right to enforce a contract by alleging third party beneficiary status, an agent under the contract (Dryer v. Los Angeles Rams, 40 Cal.3d 406 [2002] or derivatively as benefiting under the contract; Flores v. Evergreen at San Diego, LLC, 148 Cal.App.4th 581 (2007) [skilled nursing facility].

See, Signatories & Non Signatories, Ch. XVI-F-5.

3. Notice: Litigation Filed  [TOC]

If litigation is filed, CCP 1281.2 permits a party seeking arbitration of a "controversy" to file a petition to compel arbitration and stay litigation, in lieu of filing an Answer to the Complaint, by alleging a written agreement to arbitrate and refusal, or failure, of the other party to comply; CCP 1290. The opposition may file a Response within 10 days and must do so to avoid deeming the allegations in the petition admitted; CCP 1290; 1290.6.

Allegations contained in a Response to the petition are deemed "controverter or avoided" (presumably to eliminate the need to file a reply by petitioner); CCP 1290.2. The parties may extend time limits by written agreement, or the court may extend the time upon a showing of "good cause;" CCP 1290.6

4. Notice: Litigation Not Filed  [TOC]

When no civil action has been filed, a demand to compel arbitration (notice to arbitrate) may be served directly on the opposing party, or on counsel if known, based upon the terms of the arbitration clause in the contract. In the event the party fails or refuses to participate, the moving party may file a petition to compel arbitration; Brock v. Kaiser Found. Hospitals, 10 Cal.App.4th 1790 (1992); or, if the agreement provides for entry of an award in the event of no response, the party may seek a default from the arbitrator; Brink v. Allegro Builders, Inc., 58 Cal.2d 577(1962). Service on counsel is sufficient; Dennis v. Overholtzer, 202 Cal.App.2d 751 (1962); Davis v. Hamedany, 2005 WL 678572 (Cal.App.) [Non.Cite.]. Or, the arbitration rules executed by the parties may provide for a hearing upon proper notice, i.e., a self enforcing clause; Oh Young Indus. Co., Ltd v. E & J Textile Group, Inc., 2005 WL 2470824 (Cal.App.) [Non.Cite.].

If the agreement provides for arbitration by an arbitration service provider (or a named arbitrator), the moving party notifies the provider and asks to set a hearing with the other party.  Generally, the arbitration service provider requires a party to give written notice to the other party of an intention to arbitrate.  The notice should contain a statement setting forth the nature of the dispute, names and addresses of other parties, the amount involved, if any, the remedy sought and the hearing locale requested. Copies of the demand and the agreement accompanied by a filing fee are filed with the service provider; AAA Rule R-4.

In the absence of any appearance by the noticed party, and the arbitration Rules (or arbitration agreement) permit entry of an award, the arbitrator holds a hearing similar to a default after reviewing proof of service; Brink v. Allegro Bldrs., Inc., 58 Cal.2d 577 (1962); Kustom Kraft Homes v. Leivenstein, 14 Cal.App.3d 805 (1971); Brink v. Allegro Bldrs., Inc., 58 Cal.2d 577 (1962).

Note: If the parties cannot agree on an arbitrator, CCP 1281.6 authorizes the court to appoint.

If an arbitration agreement does not specify a specific time in which to demand arbitration after an alleged breach, a party cannot wait an "unreasonable time" to notify the opposition or dilatorily file a petition to compel arbitration to avoid an allegation by the opposition that the right is waived (implied waiver). Evidence constituting an "unreasonable time" is a question of fact; Spear v. Cal. State Auto. Assn., 2 Cal.4th 1035 (1992). Once the court orders an action into arbitration, its jurisdiction is statutorily limited to appointing an arbitrator, issuing provisional relief or confirming, correcting or vacating an award; Finlay v. Saturn of Roseville, 117 Cal.App.4th 1253 (2004); Blake v. Ecker, 93 Cal.App.4th 728 (2001).

If no litigation is on file, and the court denies the petition, the order is appealable; CCP 1294(a).

If the court denies the petition to compel, and litigation is on file, the moving party has 15 days after denial to plead to the Complaint or appeal the denial; CCP 1294(a). Denial of a motion to compel is an appealable order; CCP 1294; Mayhaw v. Benninghoff, 53 Cal.App. 4th 1365 (1997).

A "motion" is tantamount to a "petition"; Mercury Ins. Grp. v. Sup.Ct., 19 Cal.4th 332 (1998); CCP 1294.

If a civil action or proceeding has been filed, the petition to compel arbitration must be filed in that action; CCP 1292.4.

A hearing on the petition is comparable to a hearing on noticed motion-except the date set for the hearing on the petition shall be given in not less than ten days; CCP 1290.2; Rosenthal v. Grt. Western Fin. Secs. Corp., 14 Cal.4th 394 (1996. A party seeking to enforce an arbitration agreement can serve the other party directly with a notice of arbitration without serving a summons and complaint; Davis v. Hamedany, 2005 WL 678572 (Cal.App.) [Non. Cite.].

Summary: In a litigated case, the moving party files a petition to compel arbitration and simultaneously seeks an order staying litigation in lieu of filing an Answer to the Complaint; CCP 1281.7. The responding party may file a response in opposition; CCP 1290. After a hearing, the trial court can grant or deny the petition (or motion). An order dismissing or denying a petition to compel arbitration is an appealable order; CCP 1294. The right to compel arbitration is not self executing as to the civil action and a petition to compel should be accompanied by a motion to stay any litigation; Brock v. Kaiser Found. Hospitals, 10 Cal.App.4th 1790 (1992). An order granting the petition is not an appealable order and an appeal lies only from a judgment (including summary judgment on the evidence presented); Abrahamson v. Juniper Networks, Inc., 115 Cal.App.4th 638 (2004); CCP 1294.2.

Similarly, if a party initiates arbitration, and a potentially arbitrable party is not included in the arbitration agreement, a stay of the proceedings-not dismissal-is the appropriate procedural mechanism to determine the role of a third party; Charles Rounds Co. v. Joint Council of Teamsters No.42, 4 Cal.3d 888 (1996); 24 Hour Fitness v. Sup.Ct., 66 Cal.App. 4th 1199 (1998).

5. Service of Petition  [TOC]

If the agreement provides for service, the petitioner must comply with its terms for notice of the time and place of the hearing; CCP 1290.4 (a)(1). If no method is outlined, service is in accord with service of a summons in California civil actions unless the party has previously appeared; CCP 1290.4(a)(2). If a party has previously appeared and served, service is in accord with the general provisions of service in Chapter 5, Section 1010 of Part 2 of the CCP. Service requires notice, a hearing date, a memorandum of points and authorities and any supporting documents.

If a party has already appeared in response to a complaint filed and served, the motion to compel does not require a summons; Ervin, Cohen, Jessup & Kassel, LLP, 147 Cal.App.4th 821 (2007).

"Service of Suit" clauses are common in contracts and are enforceable clauses in an arbitration agreement; Boghos v. Certain Underwriters at Lloyd's of London, 36 Cal.4th 495 (2005). In many cases, the party consents to jurisdiction of the court in the event of a dispute. Consent to jurisdiction is also automatic if the arbitration clause was executed in California; CCP 1293.

See, XII-A-1: Service of Petition

Special rules apply when a party seeks to enforce a lien. The moving party does not waive the right to arbitrate by seeking an order to stay the action pending arbitration; CCP 1281.5(a). Failure of a defendant to file a petition to compel arbitration prior to answering the Complaint does not constitute a waiver by itself to compel arbitration; CCP 1281.5(b).

6. Service of Petition Outside State  [TOC]

CCP 1290.4 authorizes service by personal service, registered mail, or certified mail. Proof of service requires an affidavit with a signed return receipt.

7. Response to Petition  [TOC]

Response by the person named in the petition shall be served and filed within 10 days of service unless CCP 1290.4 (other terms of service) is applicable. Time limits may be extended by written agreement or court approved "good cause"; CCP 1290.6. In the absence of a response, the "allegations of the petition are deemed admitted. Allegations of a response are deemed controverted or avoided;" CCP 1290.6. The statute is not jurisdictional and compliance excused upon a showing of "good cause"; CCP 473; Atlas Plastering, Inc. v. Sup.Ct., 72 Cal.App.3d 63 (1997); Chezek v. Aramark Uniform & Career Apparel, Inc., 2005 WL 3163855 (Cal.App.) [Non. Cite.].

8. Amending the Complaint  [TOC]

In Amalgamated T.U. v. L.A.M.T.A., 107 Cal. App.4th 673 (2004) the appellate court disallowed an amended Complaint when the trial judge denied defendant's motion to compel arbitration.

Comment: This case was decided under a CBA, but the rationale for commercial cases should be the same. If the court grants a petition to compel arbitration the plaintiff should not be allowed to amend.

C. Venue  [TOC]

Note: Distinguish venue clauses and forum selection clauses. Venue is the county where the case can be heard, an intrastate issue; forum is usually an interstate issue. "Forum" is defined as a court or judicial body; or, in arbitration, an arbitrable forum.

1. Petition Prior to Arbitration   [TOC]

Petition to compel arbitration filed prior to commencement of arbitration: If the court has jurisdiction of the person and subject matter, the proper venue is in the county where the agreement is to be performed or made: CCP 1292(a). Parties cannot agree to venue not in compliance with general legislation by stipulating to venue in a particular location; Alexander v. Sup. Ct., 114 Cal.App.4th 723 (2003). Although Alexander is a litigation case, presumably the rule would apply to an arbitration clause.

If the agreement does not specify the county of performance and the agreement was not made in California, the county where any party resides or has a place of business is the proper venue; CCP 1292.

2. Petition After Arbitration   [TOC]

Petition to compel arbitration made after commencement of arbitration: venue is in the county where the petition is filed, or has been held; CCP 1921.2. Otherwise, the provisions of CCP 1292 apply. This rule would also apply to petitions to confirm or vacate an arbitration award.

3. Alternative Counties   [TOC]

If neither of these sections apply, any county has venue: CCP 1292(c).

4. Pending Action  [TOC]

Petitions for an order to arbitrate  involved in a pending action or proceeding are filed in the court hearing the action; CCP 1292.4.

5. Continuing Jurisdiction of Court  [TOC]

The court retains jurisdiction after a petition has been filed to determine any subsequent petition involving the same agreement to arbitrate and the same controversy. Filing a subsequent petition should remain in the same court as the petition originally filed; CCP 1292.6. The court retains "vestigial jurisdiction" to hear and determine a subsequently filed petition in the same case; Titan Value Equities Group. Inc. v. Sup. Ct., 29 Cal.App.4th 482 (1994); Brock v. Kaiser Foundation Hosps., 10 Cal.App.4th 1790 (1992). Non compliance with CCP 1292.6 is not a jurisdictional defect; Sternberg, et al., 2006 WL 2244321 (Cal.App.) [Non.Cite.]

6. Change of Venue  [TOC]

A party who seeks a change of venue prior to requesting arbitration does not waive the right to arbitrate; St. Agnes Med. Ctr. v. Pacificare of Cal., 31 Cal.4th 1187 (2003).

Note: The venue provisions are “procedural requirements” and do not constitute arbitration as a subsidiary proceeding which necessarily falls with the paramount legal action; Brock.

 

Chapter XVI. Hearing on Petition to Compel Arbitration: State Court  [TOC]

Introduction

CCP 1281.2 provides: . . . "on petition of a party to an arbitration agreement alleging existence of a written agreement to arbitrate a controversy and . . . [upon] refusal of another party to arbitrate, . . . the court shall order . . . arbitration if it determines that an agreement to arbitrate exists [subject to exceptions]." To implement this statute, the court hearing the petition must determine "arbitrability"; i.e., whether the arbitration clause is valid and enforceable, and who makes that decision-the court or the arbitrator. Comparable to the federal rule, the court-or the arbitrator-must determine whether the terms of the arbitration clause warrant arbitration, and, if litigation is on file, whether to stay litigation; Omar v. Ralphs Grocery Co., 118 Cal.App.4th 955 (2004).

As noted earlier, a presumption of arbitrability exists in a contract containing an arbitration clause; Social Services Union v. Alameda Co. v. Alameda Co. Training & Employment Bd., 207 Cal. App.3d 1458 (1989). The threshold issue in every case is jurisdiction and whether the FAA preempts California law, i.e., does a state statute or judicial decision burden or prohibit arbitration of a commercial contract between parties engaged in interstate commerce.

A. Preemption  [TOC]

A pre condition for application of preemption is an interstate transaction. Whether an agreement involves interstate commerce is fact specific. Merely alleging an interstate transaction is insufficient. The moving party should submit declarations to support its contention the agreement is governed by the FAA. Compare: Woolls v. Sup.Ct., 127 Cal.App.4th 197 (2005) with Basura v. U.S. Homes Corp., 98 Cal.App.4th 1205; Hedges v. Carrigan, 117 Cal.App.4th 578 (2004).

1. Interstate Commerce  [TOC]

California has adopted the definition of "commerce" as interpreted by the United States Supreme Court in Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1996) and Citizens Bank v. Alafabco, Inc., 539 U.S. 52 (2003) in defining the scope of the FAA. The underlying transaction between the parties must "affect" commerce in order to invoke preemption; Basura v. U.S. Home Corp; Woodside Homes of Cal. Inc., v. Sup.Ct., 107 Cal.App.4th 723 (2003).

2. "Workers"  [TOC]

In Circuit City Stores, Inc. v. Adams, 532 U. S. 105 (2000) the Supreme Court exempted "workers" [in interstate commerce] as an element included within the scope of the FAA.  The term includes only those transporting goods.

B. Severing the Merits  [TOC]

The petition to compel arbitration does not involve judicial review of the merits of the claim or necessarily affect any order [stay litigation]; Mauo v. Grosvenor Properties, Inc., 99 Cal. App.4th 1085 (2002); CCP 1281.2 (c). The doctrine of separating ("separability") the arbitration clause from the terms of the contract established by the Supreme Court in Prima Paint Corp. v. Flood & Conklin, Mfg. Co., 388 U.S. 395 (1967) and confirmed in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 2006) applies in state court as well as federal courts; Rosenthal v. Grt. Western FSC, 14 Cal.4th 394 (1996); Ericksen, et al. v. 100 Oak St., 35 Cal.3d 312 (1983. Thus, a contention that fraud induced the contract, as distinct from the arbitration clause, is resolved by the arbitrator; Buckeye. The court resolves challenges to the arbitration clause itself, i.e., fraud (inducing the arbitration clause), unconscionability, duress, mistake, or lack of mutual assent; St. Agnes Med. Ctr. v. Pacificare of Cal., 31 Cal.4th 1187 (2003).

Comment: Buckeye involves the uncomplicated case clearly differentiating between the arbitration clause and the merits of the dispute. Recent cases confront the difficulty of severing the two concepts when a court must review the merits to determine “arbitrability;” Nagrampa v. Mailcoups, 469 F.3d 1257 (9th Cir. 2006).  Or, when the conflict is between the arbitration clause limiting damages and a statute authorizing plaintiff (claimant) to  recover punitive or treble damages; or, the time for filing a claim is truncated in comparison with the conventional statute of limitations.

According to the Supreme Court, damages is abstract and not a question of arbitrability but can the court (or the arbitrator) sever a clause restricting damages and conduct arbitration.  On the statue of limitations, the arbitrator must first resolve disputed facts to determine resolution.  Tolling relates to the merits-an arbitrator’s decision; Anderson v. Com Cast Corp., 500 F.3d 66 (1ste Cir.2007).

C. Burden of Proof   [TOC]

The petitioner bears the burden of proving the existence of a valid,  binding and enforceable arbitration agreement by a preponderance of the evidence and a proper record; Rosenthal v. Grt. Western. Fin. Securities Corp., 14 Cal.4th 394 (1996); City of Hope v. Cave, 102 Cal.App. 4th 1356 (2002); Banner Entertainment, Inc. v. Sup.Ct., 62 Cal.App.4th 348 (1998). The party opposing the petition bears the burden of producing, by a preponderance of evidence, any fact necessary to the defense; Rosenthal; Hotels Nevada v. L.A. Pacific Ctr., 144 Cal.App.4th 754 (2006) [fraud].   The trial court sits as a trier of fact, weighing affidavits, declarations and documentary evidence; Engalla v. Permanente Med. Grp., Inc., 15 Cal.4th 951 (1997); 24 Hour Fitness, Inc. v. Sup.Ct., 66 Cal.App.4th 1199 (1998).

D. Evidence  [TOC]

The court conducts a summary hearing in the manner provided by motions; Engalla v. Permanente Med. Grp., Inc., 15 Cal.4th 951 (1997); City of Hope, above, CCP 1290.2. No jury is required; Rosenthal. The petition to compel arbitration is a law and motion matter (CRC 3.1330) and an order denying the petition is immediately appealable; CCP 1294(a). The court makes no determination of the arbitration agreement's authenticity, only whether an agreement exists (Engalla;) and is valid (Condee v. Longwood, 88 Cal.App.4th 21 [2001]) and enforceable. The court determines any objection to enforcement of the agreement. “There is no requirement to show pecuniary damages when fraud is the basis for a defense to a petition to compel arbitation, rather than a suit  for damages;” Engalla.

Evidence submitted in conjunction with a petition to compel arbitration is generally undisputed and reviewed de novo on appeal.  If extrinic conflicting evidence is admitted, the court should observe all California rules of evidence in reviewing exhibits and declarations. Review on appeal is for "substantial evidence." The rule is the same for CBA cases; Hartnell Comm. Coll. Dist v. Sup. Ct., 124 Cal.App.4th 1443 (2004). The declaration of an arbitrator of a prior arbitration is inadmissible, although subject to exceptions; Ev.Code 703.5.

If the defendant demurs to the complaint prior to seeking arbitration, any pre-trial rulings of the trial court are not binding on the arbitrator; Groom v. Health Net of Cal., 82 Cal.App.4th 1189 (2000); [rev'd on other grounds]; Discover Bank v. Sup.Ct., 36 Cal.4th 148 (2005); Boyer v. Jensen, 129 Cal.App.4th 62 (2005).

Just as the FAA authorizes a jury trial on the "making of the agreement,"(although in practice resolved by summary judgment) the trial court resolves "arbitrability" similar to California procedural law on summary judgment; Rosenthal v. Grt. Western Fin. Securities Corp.; Marcos & Millichap REI Brokerage Co. v. Hock Investment Co., 68 Cal.App.4th 83 (1998). Existence of, and validity of, a contractual arbitration clause is a judicial determination absent a specific direction in the arbitration clause for a ruling by the arbitrator; Rosenthal.

Distinguish this rule from an "illegal" contract (not "existing"); Wolschlager v. Fidelity Natl. Ins. Co., 111 Cal.App.4th 784 (2003); Alt. Systems, Inc. v. Carey, 67 Cal.App.4th 1034 (1998). Moncharsh v. Heily & Blase, 3 Cal.4th 1 (2005) held that an otherwise enforceable arbitration clause contained in an “illegal” contract renders the contract unenforceable, i.e. void; Loving & Evans v. Blick, 33 Cal.3d 603 (1994). If the contract contains only a partial illegality, the clause is potentially subject to arbitration by severing the illegal portion of the clause; Moncharsh; Jones v. Humanscale, 130 Cal.App.4th 401 (2005).

Even if the proceeding occurs in state court under FAA rules, the trial court rules on allegations of illegality of a contract; Hotels Nevada, LLC v. Bridge Banc LLC, 130 Cal.App.4th 1431 (2005).

Note: The Hotels Nevada case may no longer the law; Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006).

Cross Reference: Under the language of the FAA, whether the parties agreed to arbitration is resolved by a motion for summary judgment or declaratory relief. The issue of "arbitrability" is a question of law. In Ivax Corp. v. B. Braun of America, Inc., 286 F.3d 1309 (11th Cir. 2002) the court criticizes "artful pleading" by naming agents as parties acting in their individual capacity. This comment is undoubtedly applicable in state courts as well.

Note: the California rule in motion practice is similar to the federal rule but with an important difference: under the federal rule, summary judgment is available as a procedural right to enforce the arbitration agreement and preclude use of a jury (assuming jurisdiction is established). California law and motion practice resolves the validity and enforcement of an arbitration clause on petitions to compel arbitration.

E. Pleadings  [TOC]

Complaints, Cross-Complaints, are pleadings filed in courts to initiate judicial proceedings (CCP 22; 420; 422.10).  Arbitration claims filed only in an arbitral forum, while in some ways similar to pleadings, are very different because they are not filed in courts and they do not initiate judicial proceedings; Sheppard v. Lightpost Museum Fund, 146 Cal.App.4th 315 (2006).  Private arbitration proceedings are not part of the judicial process; they are “non-judicial” proceedings. “Non-judicial [private contractual] arbitration proceedings are generally regulated by the procedural rules established by the arbitration agency; such proceedings are not necessarily controlled by the CCP unless expressly provided; by the arbitration rules; by the parties’ contract; or other provisions of law regulating such non-judicial arbitration;” Sheppard; Paramount Unified School Dist. v. Teachers Assn. of Paramount, 26 Cal.App.4th 1371 (1994).

An order denying a petition to compel arbitration is an appealable order (CCP 1294 (a) but the court on appeal lacks jurisdiction to review a contemporaneous trial court ruling sustaining a demurrer; Merrick v. Writer's Guild of America, West, Inc.,130 Cal.App.3d 212 (1982) [CBA case].

See, Revoking or Enforcing Arbitration Clauses, Ch. XVII.

F. Arbitrability: Interpreting the Arbitration Clause   [TOC]

1. Objections to Arbitrability  [TOC]

Questions of validity or enforceability of an arbitration clause must be raised at the hearing to compel arbitration. A party cannot proceed to arbitration and preserve these issues for later consideration by the court after the arbitration has been conducted; Reed v. Mutual Service Corp., 106 Cal.App. 4th 1359 (2003); Bayscene Resident Negotiators v. Bayscene Mobile Park, 15 Cal.App.4th 119 (1993).

2. Gateway Issues  [TOC]

Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) holds that arbitration conducted under the FAA requires trial courts to resolve only two "gateway issues": whether an agreement to arbitrate exists; whether the agreement covered the issue(s) in dispute; Omar v. Ralph's Grocery Co., 118 Cal.App.4th 955 (2004). This rule requires the trial court to determine whether the clause is subject to arbitration and whether the FAA preempts.

California courts have never adopted this expression of “gateway” characterizing a determination of whether to order arbitration and stay litigation as an issue of “arbitrability, i.e.,” the existence of an arbitration clause and its enforcement-or revocability.

Confusion frequently exists in distinguishing the contract as an agreement and the arbitration clause as an agreement.  In ruling on “arbitrability, the  rule is clear: courts determine the existence and enforcement of the arbitration clause; the arbitrator decides the merits of the alleged breach of contract. Under the FAA, and presumably under the CAA, a court cannot consider a claim the arbitration clause is unenforceable if that claim is a subterfuge for a challenge to the entire agreement as being unconscionable; Buckeye Check Cashing, Inc. v.Cardegna, 546 U.S. 440 (2006); Higgins v. Sup. Ct.. 140 Cal.App.4th 1238 (2006). 

If the parties resisting arbitration contend they never agreed to the arbitration clause at all, the court must consder that claim; Bruni v. Didion, 160 Cal.App.4th 1272 (2008) [below].

Parties can agree to authorize an arbitrator to determine "arbitrability" but the court must initially determine whether the parties have so agreed; Freeman v. St. Farm Mut. Auto Ins. Co., 14 Cal.3d 473 (1975). The language must be clear and unmistakable (United Public Employees v. City & Co. of San Francisco, 53 Cal.App.4th 1021 [1997]) and governed by the terms of the contract; Posner v. Grunwald, 56 Cal.2d 169 (1961).

3. Existence of Agreement to Arbitrate   [TOC]

CCP 1281.2 provides that the court must initially determine whether a written agreement to arbitrate "exists" and is not subject to revocation; Rosenthal v. Grt. Western Fin. Securities, 14 Cal.4th 394 (1996); Brodke v. Alphatec Spine, Inc., 160 Cal.App.4th 1569  (2008); Omar v. Ralph's Grocery, 118 Cal.App.4th 955 (2004); Marsch v. Williams, 23 Cal.App.4th 238 (1994). Parties cannot be required to arbitrate disputes they have not agreed to submit to arbitration; Los Angeles Police Protective League v. City of Los Angeles, 206 Cal.App.3d 511 (1988).

As a general rule, a party opposing arbitration challenges the clause that no arbitration clause in a  written agreement “exists” when confronted with a petition to compel arbitration.  If the court hears and rules on the petition,  the issue is resolved.  But if the parties agree to arbitration in the contract without judicial intervention, or stipulate to arbitration when a party demands arbitration, there is no judicial ruling on “existence” of the arbitration clause, and a party can allege its absence upon a petition to confirm the award: Toal v. Tardiff, 178 Cal.App.4th 1208 (2009).

A party who alleges no contract was signed by the parties, or without authority to sign, is arguing a contractual defense of lack of mutual assent, i.e., the contract was void; Rosenthal; St. Agnes Med. Ctr. v. PacifiCare of Cal., 31 Cal. 4th 1187 (2003); Marcus &. Millichap Real Estate Inv. Bokerage Co. v. Woodman Inv. Grp., 129 Cal.App.4th 508 (2005); Romo v Y-3 Holdings, Inc., 87 Cal. App.4th 1153 ( 2001); Basura v. U.S. Home Corp., 98 Cal.App.4th 1205 (2002); Banner Ent., Inc. v. Sup.Ct., 62 Cal.App.4th 348 (1998) [absence of signature not dispositive; it is the agreement which matters.] But in employment contracts, mutual assent may be manifested by written or spoken words. An employer who submits the contract to an employee with the employer's signature is sufficient for mutual assent (Marcus) absent other procedural or substantive grounds for revocation; Armendariz v. Foundation Health Care Services, 24 Cal.4th 1 (2003).

Research Note: Bruni v. Didion, 160 Cal. App.4th  1272 (2008) collects cases on whether a contract “exists”in a contract for fraud in the execution; forgery; unauthorized signatory; party lacked mental capacity.  The court cites several federal cases.

Cross Reference: Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) requires the arbitrator to decide the merits, i.e., whether the contract containing the arbitration clause is void for lack of formation of contract. The Court also distinguishes between the validity of the contract and whether a contract was concluded, i.e, absence of authority, lack of mental capacity. See, Ch. IV-F-1-a: Existence of Contract/Clause

Practice: CCP 1281.2 requires the court to find a written agreement to arbitrate “exists.”  The party alleging an arbitration agreement exists must allege-and prove-the agreement.  Usually a copy of the agreement and a declaration are sufficient.  The court holds an evidentiary hearing to determined the existence, validity and enforcement of the arbitration agreement.

The moving party  cannot rely on the allegations in the complaint to meet their pleading burden to plead “that which is to be proved;” Brodke, distinguishing Valerio v. Andrew Youngquist Construction, 103 Cal.App.4the 1264 (2002) [“admission in a pleading is conclusive on the pleader.]”

4. Formation of Agreement  [TOC]

Formation of a contract is determined by whether a reasonable person would construe objective manifestations of contractual terms, not the subjective intent or belief of any particular person. The appellate court considers all materials submitted to the trial court. In a petition to compel arbitration, the court reviews the arbitration clause in the contract to determine whether an agreement was formed.

a. Agreement to Arbitrate  [TOC]

As noted earlier, the "agreement" refers to the agreement to arbitrate, as distinguished from the merits of the underlying agreement in which it is contained; Ericksen, et al. v. 100 Oak St., 35 Cal.3d 312 (1983). At the hearing on the petition to compel, and assuming a contract and arbitration clause exist, the court must initially determine whether the parties agreed to arbitration unless they specifically agreed to assign this task to the arbitrator; First Options of Chicago v. Kaplan, 514 U.S. 938 (1995).This rule is in accord with California law; Dream Theater, Inc. v. Dream Theater, 124 Cal.App.4th 547 (2004); Romo v. Y-3 Holdings, Inc., 87 Cal. App.4th 1153 ( 2001); Banner Enterprises, Inc. v. Sup.Ct., 62 Cal.App.4th 348 (1998); Cheng-Canindin v. Renaissance Hotel Associates, 50 Cal.App.4th 676 (1996). Arbitration agreements are consentual and cannot be procured by menace or threat; Bayscene Resident Negotiators v. Bayscene Mobile Park, 15 Cal.App.4th 119 (1993).

Note: For an extensive discussion of “arbitrability” and the importance of determining whether the court or the arbitrator will resolve this issue, see Vivid Video, Inc. v. Playboy Entertainment Grps., 147 Cal.App.4th 434 (2007).

The burden is on the moving party to submit, by a preponderance of evidence, that the parties agreed to include an arbitration clause in their contract; Banner Ent., Inc. A valid agreement to arbitrate is determined by reference to state contract law principles regarding formation, revocation and enforcement of contracts generally; Lopez v. Charles Schwab & Co., Inc., 118 Cal.App.4th 1224 (2004); Bolter v. Sup. Ct., 87 Cal.App.4th 900 (2001); CPI Bldrs., Inc. v. Impco Techs., Inc., 94 Cal. App.4th 1167 (2001). Failure of a party to read the contract, or understand it, is not a defense; Rosenthal v. Grt. Western. Fin. Securities Corp., 14 Cal.4th 394 (1996); Madden v. Kaiser Found. Hospitals, 17 Cal.3d 699 (1976); Bolanos v. Khalatian, 231 Cal.App.3d 1586 (1991); Wolschlager v. Fidelity Nat'l. T.I. Ins. Co., 111 Cal. App.4th (2003); Diaz v. West Coast Labs., Inc., 2007 WL 29855284 (Cal.App.4th) [Non. Cite].

As a general rule, attorneys have authority to bind their clients but in Blanton v. Womancare, Inc., 38 Cal.3d 396 (1985) the court held "apparent authority" does not suffice to enter into an arbitration agreement on behalf of a client; CPI Builders, Inc. v. Impco Techs., Inc., 94 Cal.App. 4th 1167 (2001).

Comment: In determining “arbitrability” the court-or the arbitrator- can resolve that issue by referrring to the allegations in the complaint-if one is on file-to avoid an argument that the party seeking to compel arbitration waived an issue.  The allegations in the complaint and the operative arbitration clause should be dispositive, not the basis of issues resolved only after discovery; Francis v. Westlan Const., Inc. 2007 WL 4328354 (Cal.App.) [Non.Cite.].

b. Written Agreement  [TOC]

As a general rule, the contract must be in "writing" (CAA & FAA), but in some cases an exception applies if evidence establishes the parties failed to sign but intended to be bound; Basura v. U.S. Home Corp., 98 Cal.App.4th 1205 (2002); Law Offices of Ian Herzog v. Law Offices of Joseph Frederics, 61 Cal.App.4th 672 (1998) [settlement agreement].

In some cases, a non-signatory to a contract containing an arbitration clause with third parties can enforce their contract despite the absence of a "writing" by the non signatory; Turtle Ridge Media Group, Inc. v. Pacific Bell Directory, 140 Cal.App.4th 828 (2006). See, Non-Signatories and Signatories, C-5, this Chapter.

Cross Reference:  Ch. III-B-3; “Writing Required;” Seawright v. American General Financial Services, Inc., 507 F. 3d 967 (6th Cir. 2007).

c. Incorporation of Documents  [TOC]

General contract law permits a party to incorporate a s secondary document by reference even though not physically a part of the basic contract . . . ["T]he parties may incorporate by reference into their contract the terms of some other document . . . but each case must turn on its facts . . . For terms to be incorporated . . . the reference must be clear and unequivocal...and must be called to the attention of the party . . . who must consent to the terms . . . [and] the document[s] must be known or easily available to contracting parties"; Shaw v. Regents of Univ. of California, 58 Cal.App.4th 44 (1981); Wolschlager v. Fidelity National Title Ins. Co. [title insurance policy]; Kleveland v. Chicago Title Ins. Co., 141 Cal.App.4th 761 (2006) [title insurance policy]; Chan v. Drexel Burnham Lambert, Inc.,178 Cal.App.3d 632 (1986) [stockbroker]; Slaught v. Bencomo Roofing Co., 25 Cal.App. 4th 744 (1994); Boys Club of San Fernando Valley v. Fidelity & Deposit Co., 6 Cal.App.4th 1266 (1992) [surety]; Adajar v. RWR Homes, Inc., 160 Cal.App.4th 563 (2008) [residential construction warranty].

See, next, for discusssion of the difference between incorporation of documents and integration of documents.

The terms of general contract law apply in interpreting the validity and enforcement of an arbitration clause involving incorporation of documents.

In some cases, multiple agreements do not incorporate documents directly but a separate related document is arguably incorporated. Legally classified as "stand alone" contracts, employment agreements are most common in this category. Their enforcement is judged on whether the language of the contract incorporates documents or subsequent conduct by an employee who ratified the agreement.

Practice: In Adajar v. RWR Homes, Inc., 160 Cal. App.4th 563 (2008) the home builder failed to offer in evidence its warranty to buyers during the hearing on a petition to compel arbitration.  Absent this evidence, no arbitration clause “exists.”

See, Stand Alone Contracts, this Section-F-4-e.

See, Third Party Non Signatories:  this Chapter, XVI-F-5.

Cross Reference:  Ch. IV-E-4: Incorporation of Documents

d. Ambiguous or Disputed Arbitration Clauses  [TOC]

Resolution of ambiguous clauses are fact specific. Although the court should apply the "presumption" of arbitration in ruling on an ambiguous clause in attempting to determine the parties' intent, the court may rely on evidence, i.e., trade/industry practices, conduct of the parties, or related agreements; Hartnell v. Comm. College Dist. v. Sup. Ct., 124 Cal.App.4th 1443 (2004).

Examples of terms of disputed arbitration clauses:

Interpretation of clause: Maggio v. Windward Capital Mgmt. Co., 80 Cal.App.4th
1210 (2000) [specific reference to arbitrable forum]. Lopez v. Charles Schwab & Co., Inc., 118 Cal.App.4th 1224 (2004); Pratt v. Gursey, Schneider & Co., 80 Cal.App.4th 1105 (2000); 24 Hour Fitness, Inc. v. Sup.Ct., 66 Cal.App.4th 1199 (1998); Wilkins v. Weber Motors Fresno, Inc., 2005 WL 1941273 Cal.App.) [Non Cite.] [integrated arbitration agreement].

Comment:  A party can argue that the contract is “integrated” ( superseding all prior contracts); or that one document “incorporates” another; or multiple contracts are “interdependent” or “interrelated” to each other.  This issue arises when an arbitration clause occurs in one contract but not the other.  The solution to this issue is drafting an arbitration clause in each agreement rather than a integration clause.

Note: Extrinsic evidence, if conflicting, is reviewed for "substantial evidence"; absent this element, the review is de novo; Alliance Title Co., Inc. v. Boucher, 127 Cal.App.4th 262 (2005). In Lopez, the court examined the agreement between the parties and concluded the ambiguity in the language was unenforceable. In most clauses containing ambiguous language, the Supreme Court has applied the presumption of arbitrability.

Modification of clause: CCP 1280 (f) permits the parties to extend or renew a written agreement to arbitrate but the clause cannot be modified orally; Magness Petroleum Co. v. Warren Resources of Cal., Inc., 103 Cal.App.4th 901 (2002);

Updating arbitration agreements: Martinez v. Specialty Gases, Inc., 83 Cal.App.4th 1236 (2000);

Unsigned arbitration clause: Romo v. 3-Y Holdings, Inc., 87 Cal.App.4th 1153 (2001);

Unilateral termination of contract: Mitchell v. American Fair Credit Assn., 99 Cal.App.4th 1345 (2002); Badie v. Bank of America, 67 Cal.App.4th 779 (1998); 24 Hour Fitness, Inc. v. Sup.Ct., 66 Cal.App.4th 1199(1998).

Electronic writing: An electronic signature is the equivalent of a written agreement; CC 1633.7(b);

Repudiation of contract (rescission) is not a waiver of the right to arbitrate (as distinguished from impliedly repudiating an arbitration agreement by litigation conduct) nor does rescission of the contract (fraud, mistake, duress, breach of warranty) invalidate the right of a party to seek arbitration; St.Agnes. Med. Ctr. v. Pacificare of Cal., 3 Cal.4th 1187 (2003);

Mutual assent: Banner Ent., Inc., v. Sup.Ct., 62 Cal.App.4th 348 (1998); C.C. 1550(2);

Mistake of fact: Architects & Contractors Estimating Services, Inc. v. Smith, 164 Cal.App.3d 1001 (1985); C.C. 1689; 1577.

Attorney-client: CPI Bldrs., Inc. v. Impco Techs., Inc., 94 Cal. App.4th 1167 (2001);

Employment contracts; See, Employment Contracts; Unconscionable Contracts, Ch. XVII-C-4. See, Wilkins, above.

NASD Arbitration: McManus v. CIBC World Markets Corp., 109 Cal.App.4th 76 (2003).

e. "Stand Alone" Contracts  [TOC]

In cases involving multiple contracts, the court may incorporate documents by reference. But in the absence of express or implied terms, a contract may "stand alone" on its own merits. Employment contracts often include the agreement and a separate handbook explaining company policies, sometimes including the arbitration agreement. Cases are legion that an employee alleges never receiving the handbook; never signing or initialing the handbook, etc.; 24 Hour Fitness Inc. v. Sup.Ct., 66 Cal.App.4th 1199 [failure to read handbook before signing irrelevant]. Frequent reversals in the court now lead employers to insist on a "paper record" evidencing receipt, signature, acknowledgment and understanding of arbitration or other ADR procedures, and a waiver of jury; Romo v. 3-Y Holdings, Inc., 87 Cal.App.4th 1153 (2001.

f. "Carve Out" Clauses  [TOC]

Parties can agree to exclude an issue from arbitration; Oakland-Alameda Co. Coliseum Authority v. CC Partners, 101 Cal.App.4th 63 (2002). These cases are fact specific as to whether an issue is severable from the clause.

g. Arbitration Service Provider Rules  [TOC]

After the parties have agreed to retain their services, most arbitration service provider Rules are incorporated into the arbitration. There is no general requirement that a contract containing an arbitration clause must attach applicable arbitration rules if described and the source identified; Wolschlager v. Fidelity Nat. Title Ins. Co, 111 Cal.App.4th 784 (2003).). Nor does this constitute an element of "procedural arbitrability." Mathewson v. BDO Seidman, 2006 WL 864522 (Cal.App.) [Non.Cite.]. See, Ch. XVII-B, Procedural Arbitrability.

Practice: When retained, an arbitration provider will send a copy of its rules to all parties. These Rules become part of the arbitration process and enforceable by the arbitrator. Requiring the party to seek out an unfamiliar source of rules elsewhere is subject to a challenge of unconscionability, particularly if remedies are limited; Harper v. Ultimo, 113 Cal.App.4th 1402 (2003); c.f., Frog Creek Partners LLC v. Vance Brown, LLC, 2007 WL 4533527 (Cal.App.) [Non.Pub.]; or, in certain kinds of contracts a mere reference to Rules may be insufficient to comply with the relevant statute; Ogle v. Pacificare Life & Health Ins. Co., Inc., 2007 WL 615956 (Cal.App.) [Non.Cite.) [health care contracts].

5. Arbitrable Parties & Issues [TOC]

a. Other Issues Between Same Parties  [TOC]

CCP 1281.2(c) authorizes the court to stay an order to arbitrate if non-arbitrable issues between the same parties are subject to a pending action or special proceeding and a determination of such other issues eliminates the subsequent need for arbitration ("make the arbitration unnecessary"). Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2005).  In Sanders v. Kinko's, Inc., 99 Cal.App.4th 106 (2002) the court held that California procedural rules do not conflict with FAA rules and do not involve preemption.

b. Other Issues With Third Parties  [TOC]

If "[a] party to the arbitration agreement is also a party in a pending court action or special proceeding with a third party, arising out of the same transaction, or series of related transactions, and there is a "possibility of conflicting rulings of common issues of law or fact," the court may deny arbitration;" CCP 1281.2(c); Cronus; Mt. Diablo Med. Ctr. v. Health Net of Ca., Inc., 101 Cal.App.4th 711(2002); One World Networks Integrated Technologies, Inc. v. Duitch, 103 Cal.App. 4th 1038 (2002). But the statute only applies when the motion to stay arbitration is filed by the party resisting arbitration; Whaley v. Sony Computer Ent. America, 121 Cal.App.4th 479 (2004).

CCP 1281.2(c) authorizes the court to provide the following alternatives in cases involving multiple parties or issues (as a ground to deny arbitration):

Refuse to enforce arbitration and may order intervention or joinder of all parties in a single proceeding;

Order intervention or joinder as to all or only certain issues;

Order arbitration among parties who have agreed to arbitration and stay action pending outcome of arbitration proceedings;

Stay arbitration pending outcome of court action or proceeding;

In Cronus Investments, Inc.the court, citing Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468 (1989),  held CCP 1281.2 (c) authorizes the court to deny arbitration and consolidate arbitrable and non arbitrable claims involving third parties; Mt. Diablo Med. Ctr.; Best Interiors, Inc. v. Millie & Severson, 161 Cal.App.4th 1320 ( 2008).

CCP 1281.2 is not preempted by the FAA and an arbitration conducted under FAA rules in state court makes no difference; Cronus. But if the parties expressly agree to use FAA procedural rules, and no choice of law clause is included, the FAA governs; Cronus; Rodriguez v. American Technologies, Inc., 136 Cal.App.4th 1110 ( 2006); Best Interiors. When a choice of law is included, the language of the arbitration clause trumps; Valencia v. Smyth, 185 Cal.App.4th 153 (2010). A plaintiff cannot use this Section offensively to avoid arbitration by joining other defendants not subject to arbitration. The court can sever the parties, or if collateral litigation is pending, also sever; Madden v. Kaiser Foundation Hosps., 17 Cal.3d 699 (1976); CCP 1281.4.

See, also, Cuevas v. Truline Corp.,118 Cal.App.4th 56 (2004). A passenger in a motor vehicle involved in a three car/truck collision arbitrated against one party, received an award, entered judgment, and litigated against the other party with whom there was no arbitration clause or agreement. The award did not operate either as collateral estoppel nor a violation of the one judgment rule; CCP 1281.4.

CCP 1281.4 provides that if a court has ordered arbitration involving an issue in a collateral pending action, or in an undetermined action, the court may stay the action; Marcus v. Sup.Ct., 75 Cal.App.3d 204 (1977); Heritage Provider Network, Inc. v. Sup.Ct., 158 Cal.App.4th 1146 (2008).

As noted above, a party may also seek to stay arbitration purusunt to CCP 1281.2.

Note: In an unpublished (and non citeable) case the California Court of Appeal discussed the linguistic differences between CCP 1281.2 (c ) applicable to third parties and the same subsection applicable to two parties in their roles of arbitrable and non arbitrable parties; Goyette  v. Country Villa Service Corp.,  2008 WL 2561433 (Cal.App., Non. Cite). If only  parties are involved in arbitable and non arbitrable issues, the court may delay an order to arbitrate if determination of other issues may make the arbitration uneccessary. If third parties are involved the court may exercise the options outlined above only if there is a possibilityof conflictng rulings on a commoon issue of law or fact. In other words the tests are different.

The courts in Rowe v. Exline, 153 Cal.App.4th 1276 (2007) and RN Solution, Inc. v. Catholic Healthcare West, 165 Cal.App.4th 1511 (2008) both explain that CCP 1282.2 (c ) [authorizing the court to exercise discretion to stay arbitration if a potential conflict among parties with arbitrable and non arbitrable claims exists]  applies only to third parties not bound by an arbitration clause and who are involved in collateral proceedings.  If all parties are bound by an arbitration clause, the court may then sort out arbitrable and non arbitrable claims and entertain a motion to stay the non arbitrable claims; CCP 1281.4.

Practice: Here is the procedure a trial court should follow according to RN Solution, Inc. and Muhoberac v. Boyle, 2009 WL 2470638 (Cal.App., Non Cite): “[T]he court should have first determined the arbitrable and nonarbitrable claims alleged in the complaint, ordered all of the arbitrable claims to arbitration, and stayed all such claims pending arbitration. The court would then have had discretion to delay its order to arbitrate the arbitrable claims under section 1281.2, subdivision (c), only if it first determined that the adjudication of the nonarbitrable claims in court might make the arbitration unnecessary. Absent that determination, the arbitrable claims would proceed to arbitration and the nonarbitrable claims would continue to be litigated in court unless a party moved successfully pursuant to CCP 1281.4 to stay further litigation of such nonarbitrable claims.”

“When a trial court ‘has ordered arbitration of a controversy which is an issue involved in an action or proceeding pending before’ the court, it ‘shall, upon motion of a party ... stay the action or proceeding until the arbitration is had in accordance with the order to arbitrate; CCP 1281.4. It is irrelevant under the statute whether the movant is a party to the arbitration agreement. Any party to a judicial proceeding ‘is entitled to a stay of those proceedings whenever (1) the arbitration of a controversy has been ordered, and (2) that controversy is also an issue involved in the pending judicial action. The purpose of the statutory stay is to protect the jurisdiction of the arbitrator by preserving the status quo until arbitration is resolved. In the absence of a stay, the continuation of the proceedings in the trial court disrupts the arbitration proceedings and can render them ineffective; Heritage Provider Network, Inc. v. Sup.Ct., 158 Cal.App.4th 1146 (2008).

Whether parties qualify as “third parties” may depend on the pleadings, or , as noted above, on “standing.” In Birl v. Heritage Care, LLC, 172 Cal.App.4the 1313 (2009) the widow and daughter sued as “successors in interest” and alleged wrongful death and emotional distress and as to those causes of action did not “step into the shoes of the deceased…There are significant consequences and distinctions that flow from the particular legal capacity in which a party sues.”

This issue arose in the course of health care providers.  In Ruiz v. Podolsky, 175 Cal.App.4th 227 (2009) the court discussed whether the wife and heirs were compelled to arbitrate  the deceased husband’s wrongful death claims. Under CCP 1295 a physician can demand arbitration of a claim for medical malpractice with a patient pursuant to an arbitration agreement not statutorily adhesive, and the husband had signed that kind of agreement.   The court held that the surviving heirs claim for a wrongful death of their father is not a derivative claim, and they cannot be bound to arbitration despite a collateral statute that requires consolidation of all wrongful death claims; CCP 377.60 et seq. The wife had conceded she was bound by her husband’s agreement and must arbitrate.

Result:  the claims of the husband  for wrongful death, and the claims of the wife, will be arbitrated; the heirs will try the same case in court.

 The courts in Rowe v. Exline, 153 Cal.App.4th 1276 (2007) and RN Solution, Inc. v. Catholic Healthcare West, 165 Cal.App.4th 1511 (2008) both confirm the essence of Goyette.  CCP 11282 (c ) applies only if third parties are involved in collateral proceedings.  The court may then sort out arbitrable and non arbitrable claims and may entertain a motion to stay the non arbitrable claims; CCP 1281.4.

The FAA contains no comparable section for delaying or denying arbitration, and the California statute arguably conflicts with federal policy that States may not encumber arbitration or hinder its enforcement; Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985); Volt Information Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468 (1989). Volt holds, however, that States can provide for efficient conduct of proceedings and CCP 1282(c) fulfils that procedure. If parties specifically elect to be bound by California law, the FAA does not require otherwise; Volt.

Cross Reference: Volkswagen of America, Inc. v. Sud’s of Peoria, 474 F.3d 966 (7th Cir. 2007) appears to modify the Dean Witter Reynolds rule, holding the court can exercise its discretion when deciding arbitrable and non arbitrable claim.

Comment: Does CCP 1281.2 apply to a parallel federal court action against the same parties? Campbell Inds. v. San Diego Unified Port Dist., 2004 WL 1240579 (Cal.App.) [Non. Cite.].

In Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995) the Supreme Court held that a generic choice of law clause in an arbitration agreement only incorporates state substantive law and not the distribution of judicial and arbitral power as reflected in CCP 1281.2. California interprets Mastrobuono to mean that a choice of law clause incorporating a provision to "enforce" an arbitration clause, as distinct from "conducting" an arbitration, is consistent with federal law; Mt. Diablo Med. Ctr. v. Health Net of California, Inc. Unless California rules reflect a hostility to arbitration, the court may enforce CCP 1281.2 and deny arbitration; Cronus.

The Ninth Circuit disagrees, holding CCP 1281.2(c) is a special rule limiting the authority of an arbitrator. In a diversity case, First Fidelity Bank, FSB v. Durga Ma Corp., 386 F.3d 1306 (9th Cir. 2004) holds that California procedural rules do not apply in federal court despite a California choice of law clause.  Considerable confusion exists whether the FAA preempts procedural arbitrability in federal court; Wolsey Ltd. v. Foodmaker, Inc., 144 F.3d 1205 (9th Cir. 1998). See, Ch. XVII-B-5,Choice of Law.

c. Third Parties in General  [TOC]

California mirrors the federal rule that a party "cannot be compelled to arbitrate a dispute that he has not agreed to resolve by arbitration;" AT & T Techs. Inc. v. CWA, 475 U.S. 643 (1983); Rosenthal v. Grt. Western. Fin. Securities Corp., 14 Cal.4th 394 (1996); Madden v. Kaiser Foundation Hospital, 17 Cal.3d 699 (1976); Benasra v. Mitchell, et al., 96 Cal.App.4th 96 (2002); Lee v. Southern Cal. Univeristy for Professional Studies, 148 Cal.App.4th 783 (2007).

Pre-Existing relationship; But in some cases, third parties may be bound if a pre-existing relationship exists; Co. of Contra Costa v. Kaiser Foundation Health Plans, Inc., 47 Cal.App.4th 237 (1996); NORCAL Mutual Ins. Co. v. Newton, 84 Cal.App. 4th 64 (2000); [agents]; 24 Hour Fitness, Inc. v. Sup. Ct., 66 Cal.App.4th (1998) [spouses]; (Bolanos v. Khalatian, 231 Cal.App.3d 1586 (1991) [parents of minor children]; Piatrelli v. Peacock, 13 Cal.App.4th 943 (1993) [conceived child].

An intended third party beneficiary may also be bound by the arbitration agreement contingent upon the evidence; Buckner v. Tamarin, 98 Cal.App.4th 140 (2002); Harris v. Sup.Ct., 188 Cal.App.3d 425 (1995); See below. At the very least, a party must be named and served before an arbitration agreement is binding on a third unnamed party; Boyer v. Jansen, 129 Cal.App.4th 62 (2005).

Agency is the most common method of including parties in an arbitration clause signed by another party (principal); CC 2295; 2319. The capacity in which a person signs is crucial; Benasra v. Mitchell, et al. Under the general law of contracts, the agent must be employed by the principal who has conferred authority to act; CC 2299 (actual agency) or, the principal by statement or conduct causes a third party to believe agency exists; Howell v. Courtesy Chev., Inc., 16 Cal.App.3d 391 (1971); C.C. 2300 [ostensible agency]. But an agent who signs on behalf of a disclosed principal is not bound in his representative capacity; Benasra; Boyer v. Jensen, 129 Cal.App.4th 62 (2005). Platypus Wear, Inc. v. Cahill, 2006 WL 281117 (Cal.App.) [Non.Cite.; "de facto corporate officer").

In the normal commercial context, these rules apply in contract but in tort allegedly "arising out of contract" the application of this principle may differ; Pagarigan v. Libby Care Ctr., Inc., 99 Cal. App.4th 298 (2002) [adult children of parent in nursing home]; Buckner v. Tamarin; Goliger v. AMS Props., Inc., 123 Cal.App.4th 374 (2004) [adult child signed only as "responsible party" for contract]; Fitzhugh v. Granada Healthcare and Rehabilitation Ctr., LLC, 150 Cal.App.4th (2007) 469[wrongful death cause of death survives;] Garrison v. Sup.Ct., 132 Cal.App.4th 253 (2005) [medical malpractice claims arising out of alleged negligence committed in a skilled nursing facility]. Garrision collects cases on this subject. (See, also Waterman v. Elvergreen at Petaluma, LLC, 2008 WL 4359556 (Cal.App.) [Non.Pub.] for collecting cases. 

See, Ch. XVII-C-5; Statutorily Mandated Arbitration. In Garrison, the party had a power of attorney, i.e., the legal relationship of a fiduciary with a client.

Note: Closely related to this topic is Procedural Arbitrability (Ch. XVII-B) when one party is in litigation with a third party, and the court must determine whether to stay litigation; Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 217 (2005); Whaley v. Sony Computer Ent. America, Inc.,121 Cal.App.4th 479 (2004); CCP 1281.2.

See, also, Ch. XV-B-5; Standing.

Practice: In an arbitration ordered by the court, the judge identifies the signatories  bound by the arbitration clause but a non –signatory can appear and seek joinder. If the court orders arbitration without prior intervention by a third party, and the arbitration begins or matures, the arbitrator can join an additional party; CCP 1280 (e) (3).  Or, if the arbitration is self-executing, a third party may also seek joinder from the arbitrator.
The statute imposes no restrictions on the timeliness or the standard for intervention but CCP 387 is applicable in litigation.

 The most common example is agency. Merely because a person is a member of an entity with multiple personnel does not automatically confer agency status, and the arbitrator may need to sort out the legal characterization of a non-signatory either as a partner, joint venturer, independent contractor, assignee or holder of a performance bond.

In Abou-Khalil v. Miles, 2007 WL 1589456 (Cal.App.) [Non.Cite.] a female employee filed a civil action alleging sexual harassment by a male member of a law firm. Filing a petition to compel, he attempted to establish his agency status to take advantage of a broad form arbitration clause to resolve disputes between the firm and himself. According to the Court of Appeal, the scope of the arbitration clause did not include evidence of an agency relationship in the absence of a declaration of agency from the principle, or a ratification.  The law firm member attempting to establish agency could testify (or submit a declaration to the court or arbitrator) to his duties but not his status as an agent, i.e., actual or ostensible.  In other words, he lacked “standing” to petition the court for arbitration.

d. Consolidation   [TOC]

CCP 1281.3 permits the court to consolidate arbitration clauses between the same party or third parties under the following circumstances:

The dispute must arise from the same transaction;

Involve a common issue of law or fact;

Result in a possibility of conflicting rulings by an arbitrator(s); Mercury Ins. Grp. v. Sup.Ct., 19 Cal.4th 332 (1998). If the court has ordered the action to arbitration, consolidation is an arbitrator's decision; Yuen v. Sup.Ct.,121 Cal.App.4th 1133 (2004).

In Parker v. McCaw, 125 Cal.App.4th 1494 (2005) the trial court consolidated two cases with the same parties. In doing so, the appellate court concluded the two contracts provided different rules for the selection of an arbitrator. The trial court failed to consider this a "substantial right" jeopardized by consolidation.

Comment: On appeal from the judgment confirming the award in Parker, the prevailing party argued that the losing party should have petitioned for mandate after the trial court order to consolidate. According to the Parker court, this failure to exercise the option was immaterial. Given that the Parker court regarded consolidation a deprivation of a substantial right, this refusal by the losing party to consider mandate as an option will cost the parties additional expense in new arbitrations.

See, Ch. XIV-J;. Mandate

The California Supreme Court has approved trial court consolidation of arbitration claims with litigation claims involving multiple parties in the exercise of the court’s discretion; Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2005). In a two party case involving arbitrable and inarbitrable claims, the court clearly has discretion to sever and stay the inarbitrable claims; Cruz v. PacifiCare Health Systems, Inc., 30 Cal.4th 303 (2003).

Cross Reference : In Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003) the Supreme Court apparently identifies "consolidation" as a procedural issue for arbitral resolution in a state court operating under the FAA. The Cronus court did not address this issue. At the hearing to compel arbitration, the court should resolve any issues of consolidation as a procedural mechanism to avoid inconsistent results. Federal courts have held that the FAA does not authorize consolidation of multiple arbitration agreements. If consolidation is a procedural issue under Green Tree and Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) the arbitrator could order consolidation.

In drafting arbitration clauses for projects with multiple parties, i.e., construction defect, counsel in Garden Grove Community Church v. Pitt-Des Moines Steel Co., 140 Cal.App.3d 251 (1983) drafted an escape clause that provided: "no arbitration unless all parties to the contract were bound.” The court honored the agreement but coordinated all parties.

e. Severance of Parties & Issues   [TOC]

CCP 1281.4 permits the court to sever parties or issues if the court has ordered arbitration and stay collateral litigation involving the same issues. The most common application of this procedural device occurs in unconscionable arbitration agreements.

An arbitration clause may contain an unconscionable provision independently unenforceable. If the clause is permeated with unconscionable procedural or substantive terms, severance is impossible; Little v. Auto Ziegler, Inc., 29 Cal.4th 1064 (2003); Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000). Otherwise, unconscionable terms are severable and the clause enforced; Basura v. U.S. Home Corp., 98 Cal.App.4th 1205 (2002); Woodside Homes of Cal., Inc. v. Sup.Ct., 107 Cal.App.4th 723 (2003); Abrahamson v. Juniper Networks, Inc., 107 Cal.App.4th 424 (2003); Fitz v. NCR Corp., 118 Cal.App.4th 702 (2004); O'Hare v. MRC, 107 Cal. App.4th 267 (2003).

The California Supreme Court has also allowed severance of arbitrable and inarbitrable remedies. In Broughton v. Cigna Healthplans of Ca., 21 Cal.4th 1066 (1999) the court severed claims serving a public purpose from common law claims filed by an individual. Common law claims were subject to arbitration; statutory claims were not; Fittani v. Palm Spgs. Motors, 105 Cal.App.4th 708 (2003).

Comment: Courts have invoked the term "illegal" to arbitration terms which are unenforceable. This misdescription of an "unenforceable" contract should be distinguished from contracts illegal per se. If an otherwise enforceable arbitration agreement is contained in an illegal contract, and cannot be severed, the court cannot compel arbitration. If the illegality applies only to a portion of the contract not included in the arbitration agreement, the entire controversy remains arbitrable; Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992).

f. Signatory and Non-Signatory Parties  [TOC]

A signatory to an arbitration agreement can compel a non signatory to arbitrate if the latter has received benefits from the contract; Dryer v. L.A.Rams, 40 Cal.3d 406 (1985); Boys Club of San Fernando Valley v. Fidelity & Deposit Co., 6 Cal.App.4th 1266 (1992); Metalclad Corp. v. Ventana Env. Org. Partnership, 109 Cal. App.4th 1705 (2003) [applying federal law]; Cheng v. Sup.Ct., 2004 WL 2785893 (Cal.App.) [Non. Cite.].

Under general contract law, the parties must directly contract for the benefit of a third party.  Incidental benefits are insufficient; Matthau v. Sup.Ct., 151 Cal.App.4th 593 (2007).

Resolution of participation by a non signatory who objects on jurisdictional grounds, or a party not included within the scope of the arbitration clause is an issue for the trial court; American Builder’s Assn. v. Au-Yang, 226 Cal.App.3d 170 (1990).

See, this Chapter; F-2. The court determines issues for arbitration and the parties included within the arbitration clause (or other parties subject to its terms if not specifically named) as an issue of “substantive arbitrability;” Matthau. A party who objects to participation in arbitration cannot wait until the arbitrator assumes jurisdiction.  To preserve the jurisdictional question the party must seek judicial relief before proceedings commence by filing  a petition in court to stay arbitration proceedings; Cummings v. Future Nissan, 128 Cal.App.4th 321 (2005); Liu v. Pham, 2008 WL 933553 (Non.Pub.) [Cal.App]

Cross Reference: These cases tend to be fact specific and depend on the terms of the contract; Thornton v. Career Training Ctr., Inc., 128 Cal.App.4th 116 (2005). If the transaction is in interstate commerce, the courts are not in agreement whether state or federal law applies; Flink v. Carlson, 856 F2d 44 (8th Cir. 1988); c.f., Washington Mut. Finance Group, LLC v. Bailey, 364 F.3d 260 (5th Cir. 2004).

Note: Class Actions include representative parties and putative parties whose identities are not necessarily known at the time the Complaint is filed. In effect, these putative parties are non-signatories to the contract and may lack arbitration clauses in their contracts. Although California permits arbitration of class actions (Discover Bank v. Sup.Ct., 36 Cal.4th 148 [2005]); Keating v. Sup. Ct., 31 Cal.3d 584 [1982]; Roe 1 v. Bijou v. Group, Inc., 2005 WL 914755 (Cal.App.) [Non. Cite.] compelling their inclusion in a petition to compel arbitration of the representative parties is difficult.

See, this Chapter, Class Actions

Cross Reference: Ch. IV-F-2-b; c.

g. Non-Signatories and Signatory Parties  [TOC]

The court decides whether non-signatories may compel signatory parties to participate in arbitration under the doctrine of "equitable estoppel"; Aguilar v. Lerner, 32 Cal.4th 974 (2004); Molecular Analytical Systems v. Ciphergen Biosystems, Inc. 2010 WL 2698505 (Cal.App.);* Parrish v. Cingular Wireless, LLC, 129 Cal.App.601 (2005) [reversed on other grounds)]; Rogers v. Peinado, 85 Cal.App.4th 1 (2000) [overruled on other grounds]; Brennan v. Temco, 25 Cal.4th 310 (2001). The doctrine is also invoked if a party is seeking to enforce other provisions of the contract that are beneficial to it; Metalclad Corp. v. Ventana Eng. Org., PP, 109 Cal.App.4th 1705 (2003); Derlantiss v. Heritage Convalescent Hosp., Inc., 2005 WL 1275143 (Cal. App.) [Non.Cite]; or seek a stay of litigation among signatories and another party until the arbitration is complete; or may enforce the arbitration agreement; Valley Casework, Inc. v. Comfort Construction, Inc., 76 Cal.App. 4th 1013 (1999); "A non-signatory party may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the non-signatory are 'intimately founded in and intertwined' with the underlying obligations; Boucher v. Alliance Title Co., Inc. v. 127 Cal.App.4th 262 (2005); Turtle Ridge Media Grp. v. Pacific Bell Directory, 140 Cal.App.4th 828 (2006; Metalclad Corp.[torts]; Goldman v. KPMG, 173 Cal.App.4th (2009); Molecular Analytical Systems v. Ciphergen Biosystems, Inc. 2010 WL 2698505 (Cal.App.).*

The equitable estoppel doctrine also applies when a party has signed an agreement to arbitrate but attempts to avoid arbitration by suing non signatory defendants for claims that are ‘based on the same acts and are inherently inseparable’ from arbitrable claims against signatory defendants; Metaclad.

In Boucher, the court citing Thompson-CSF, S.A. v. AAA, 64 F.3d 773 (2d Cir. 1995), listed several methods for estoppel: incorporation by reference; assumption; agency; veil-piercing/alter ego; estoppel.

Similarly, a willing non-signatory can join an arbitration if the clause is sufficiently broad to encompass the claim; Zakarian v. Bekov, 98 Cal.App.4th 316 (2002). Whether state law or federal law is applicable is determinative in a dispute; NORCAL Mutual Ins. Co. v. Newton, 84 Cal.App.4th 64 (2000).

Non-signatories cannot enforce the clause if they have engaged in inequitable conduct; Dickson, et al. v. Pole, 83 Cal.App.4th 436 (2000); One World Networks Integrated Techs., Inc. v. Duitch, 103 Cal.App.4th 1038 (2002).

In Roe 1 v. Bijou Group, Inc., 2005 WL 914755 (Cal.App.) [Non.Cite.] the court discussed the role of compelling non signatories to arbirate in the context of class actions.

Note: Resolution of non-signatories compelling a signatory to arbitrate depends on whether state or federal law is applicable. If the transaction is in interstate commerce, the federal law applies; Turtle Ridge Media Grp., Inc. v. Pacific Bell Directory, 140 Cal.App.4th 828 (2006). The issue is not "what" is subject to arbitration but "who" is subject to arbitration; Metalclad Corp. v. Ventana Eng. Org. PP, 109 Cal.App.4th 1705 (2003). This is not a question of formation or existence of an arbitration clause but one of estoppel. According to Metalclad, Boucher and Turtle Ridge, the FAA applies if the transaction is in interstate commerce.

Cross Reference: Ch. IV-F-2-c: Non Signatories Enforcing Contract Against Signatory

h. Third Party Beneficiaries  [TOC]

In some cases, third party beneficiaries seek coverage within the terms of an arbitration clause. If so, "standing" to assert participation in arbitration becomes an issue; City of Hope v. Bryan Cave, 102 Cal.App.4th 1356 (2002). Under general contract law, a party who is the express beneficiary of an agreement can enforce the rights designated according to the scope of the provisions; Harris v. Sup.Ct., 188 Cal.App.3d 475 (1986); CC 1559. A third party beneficiary may also enforce a contract between other parties if the acts of the contracting parties created a duty and established privity between the promisor and the third party beneficiary; Johnson v. Holmes Tuttle Lincoln-Mercury, 160 Cal.App.2d 290 (1958). This rule applies in the context of arbitration; Van Tassel v. Sup.Ct., 12 Cal.3d 624 (1974); Mercury Casualty Co. v. Maloney, 113 Cal.App.4th 799 (2003). The burden of proof is borne by the third party; Neverkovec v. Fredericks, 74 Cal.App.4th 337 (1999).

As a general rule, third party beneficiary status does not always flow from the contract itself, but non-signatories can enforce a contractual term made for their benefit even though not expressly named. Resolution is by ordinary contract interpretation; Garcia v. Truck Ins. Exchange, 36 Cal.3d 426 (1984).

By the same token, an arbitration agreement signed on behalf of a minor by his parents is subject to arbitration; Co. of Contra Costa v. Kaiser Foundation Health Plan, 47 Cal. App.4th 237 (1996); Scrosati v. Mc-Roy Wilbur Comms., Inc., 2005 WL 590626 (Cal.App.) [Non. Cite.]

i. Medical Contracts & Third Parties  [TOC]

The legal relationship between patient, hospital, and doctor is critical in determining whether a plaintiff is bound by an arbitration clause in a group contract; Azteca Const., Inc., v. ADR Consulting, 121 Cal.App.4th 1156 (2050); Hollister v. Benzl, 71 Cal.App.4th 582 (1999) [doctor an independent contractor]; Harris v. Sup. Ct., 188 Cal.App.3d 475 (1986) [doctor an employee]; Weeks v. Crow, 113 Cal.App.3d 350 (1980) [mother of unborn child); Zakarian v. Bekov, 98 Cal.App.4th 316 (2002) [Cal. Med. Rules]; Bolanos v. Khalatonian, 231 Cal.App.3d 1586 (1991) [unborn child and father]; Medical Staff of Doctors Med. Ctr. in Modesto v. Kamil, 132 Cal.App.4th 679 (2005) [medical staff; Cal.Code Regs., Title 22, Section 70703].

j. Additional Parties   [TOC]

A plaintiff may join non-parties to the arbitration agreement as defendants, but that does not affect arbitration with the party [ies] who does [do]have the arbitration agreement. The court may sever parties or limit any stay of litigation as to those issues subject to arbitration; Madden v. Kaiser Found. Hosps., 17 Cal.3d 699 (1976); Henry v. Alcove Inv., Inc., 233 Cal.App.3d 94 (1991); CCP 1281.2.

Practice: Note that CCP 1280 (e) (3) allows the arbitrator to add third parties independently or upon application of a party or a third party. As preparation for arbitration matures, additional parties with related issues and affected by the award may surface. Case law on this statutory authority does not enlighten the parties whether to challenge joinder from the court, despite CCP 1280 (e) (3), or directly from the arbitrator. CCP 1280 would seem disposive but subject to challenge subsquent to issuance of an award.

k. Alter Ego  [TOC]

An arbitrator lacks jurisdiction to impose an alter ego award and cannot add an alter ego party by "correcting" an award; Jonesfilm v. Hoffman, 2006 WL 1174178 (Cal.App.) [Non. Cite.]. CCP 1284 does not permit an arbitrator to correct an award among non parties But the court can correct the award; Hall, Goodhue, et al. v. Marconi Conf. Ctr. Bd., 41 Cal.App.4th 1551 (1996); CCP 1286.6. CCP 187 (allowing judicial correction of a judgment) is jurisdictiional and  permits the court to amend a judgment (within limits).

In Rowe v.  Exline, 153 Cal.App.4th (2007) the court allowed non-signatory alter egos, as alleged by the plaintiff in his complaint, to join an arbitration with a signatory on  grounds they were comparable to agents and in fact were the corporation.  The burden of proof is on the Claimant.

In Greenspan v. LADT, LLC, 185 Cal.App.4th 1413 (2010) the court held the Rules of an arbitration service provider may allow an arbitrator to find alter ego.  Even the absence of Rules this  finding is within substantive law and subject to a finding by the arbitrator.

Practice: If a party discovers potential liability of the corporate entity after filing a judgment confirming an award, a motion to amend is in order, but due process requires that the corporation was "virtually represented;" Baize v. Eastridge Companies, LLC, 142 Cal.App.4th 293 (2006). Baize discusses the law of alter ego in general.

l.  Judicial Estoppel  [TOC]

The increasing number of awards in arbitration may surface in subsequent arbitration or litigation.  In addition to the role of collateral estoppel and res judicata, the courts retain the power of judicial estoppel.  This doctrine prevents a party from asserting inconsistent positions in a prior or collateral proceeding; Aguilar v. Lerner, 32 Cal.4th 974 (2004); Gottlieb v. Kest, 141 Cal.App.4th 110 (2007) [summarizing elements: Same party has taken  two positions; positions were taken in judicial or quasi-judicial administrative proceedings; a party was successful in asserting first position and the tribunal accepted the position as true; two positions are inconsistent ; the first position was not the result of ignorance, fraud or mistake; Jackson v. Co. of Los Angeles 60 Cal.App.4th 1171 (1997)].

Reference:  Judicial estoppel has also arisen in settlement agreeements; Fair v. Bakhtiari, 007 WL1031708 (Cal.App. [on remand; Non.Cite.]

6. Arbitrable Issues: Scope of Clause  [TOC]

State courts invoke the same analysis as federal courts in determining whether arbitrable issues fall within the scope of the agreement. Although the court decides the scope of arbitrable issues, “[it] is within the 'powers' of the arbitrator to resolve the 'merits' of the controversy submitted by the parties [and this power] . . . includes all the contested issues of law and fact submitted to the arbitrator for decision;" Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992). "The scope of arbitration is . . . a matter of agreement between the parties;" Ericksen, et al. v. 100 Oak St., 35 Cal.3d 312 (1983).

An order to arbitrate should be granted "unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute;" Cione v. Foresters Equity Services, Inc., 58 Cal.App.4gh 625 (1997). Torts, unless wholly independent of the arbitration clause, will not prevent arbitration; Buckhorn v. St. Jude Heritage Med. Grp., 121 Cal.App.4th 1401 (2004). The burden is on the opposing party to demonstrate that the court should not order arbitration of an issue;  Buckhorn.

The arbitration agreement need not specify every detail, characteristic, and consequence of the proceeding the parties contemplate, but the statute (CCP 1280 et seq.) sets forth the basic parameters of the proceedings; Vandenberg v. Sup.Ct., 21 Cal.4th 815 (1999).

Comment: This language may no longer be applicable in light of subsequent decisional law. See, Ch. XVII-C-3;  Adhesive Contracts: Ch. XVII-C-Public Policy; Ch. XIX, Arbitrator Disclosure.

Pleadings: In some cases, the pleadings may be utilized-as distinct from submisssion of a claim-for the benefit of the arbitrator to determine issues for resolution. The importance of identifying the issues for resolution cannot be over emphasized. Arbitrators are not bound by the terms of a civil complaint filed before the arbitration. "An arbitrator derives his power solely from the arbitration agreement;  Hall v. Sup.Ct., 18 Cal.App.4th 427 (1993) unless the Rules of an arbitration service provider is applicable; Greenspan v. LADT, LLC, 85 Cal.App.4th 1413 (2100).

 Parties may identify arbitrable claims indirectly by choosing a body of private arbitration rules that specify the scope of arbitrable claims; Broughton v. Cigna Health Plans of Cal., 21 Cal.4th 1066 (1999). Resolution of the scope of the arbitration clause is initially a question of law and, if the court denies the petition to compel arbitration, an appeal is reviewed de novo in the absence of extrinsic evidence. If the parties submit conflicting evidence, the appellate courts review for "substantial evidence"; Buckner v. Tamarin, 98 Cal.App.4th 140 (2002); Brookwood v. Bank of America, 45 Cal. App.4th (1667).

In Greenspan, the court surveyed the scope of the arbitrator’s powers initially and then compared the grounds for vacation of an award if the arbitrators “exceeded their powers;” CCP .  “The powers of an arbitrator derive from, and are limited by, the agreement to arbitrate, and the court looks to the parties’ agreement to see whether it placed any limitations on the arbitrators’ authority. In some situations , the agreement itself may not be the only source  of restrictions on an arbitrators’ authority. . . A submission agreement may restrict or broaden the issues contemplated by the arbitration clause.  And the rules of [an arbitration provider] may determine the scope of arbitrator’s powers .. .”

“The parties may submit for decision issues they were not contractually compelled to submit to arbitration.  In such event the court looks both to the contract and to the scope of the submissions to  the arbitrator.”  Resolution of all these issues is an arbitration issue, not judicial.  

As noted above, under arbitration service provider rules if a matter has been submitted to arbitration after litigation has been commenced, the pleadings may be incorporated as part of the record providing notice to the parties.

Note: Whether the court will enforce certain provisions in an arbitration clause is potentially an issue. Particularly in employment cases, the California Supreme Court will not enforce restrictions on punitive damages, the lack of bilateral remedies or class action waivers; Armendariz v. Foundation Health Services, Inc., 24 Cal. 4th 93( 2000); Discover Bank v. Sup.Ct., 36 Cal.4th 148 (2005).

See, Ch. XVII-C-4; Unconscionability.

Cross Reference:  Scope and Parties are often intertwined when signatories and non signatories are involved.  The court must first identify the signatories; determine the scope of arbitrable issues and then determine whether to compel non signatories to participate in arbitration; Becker v. Davis, 491 F.3d 1292 (11th Cir. 2007); Mundi v. Union Security Life Ins., 555 F.3d 1042  (9th Cir. 2009).

Cross Reference: Part I:  Ch. IV-F-3; Arbitrable Issues & Scope

7. Broad Clauses  [TOC]

The courts have drawn a distinction between "broad" clauses and "narrow clauses." This categorization is fact specific and contingent on the language of the clause and its scope. Examples:

a. Disputes "Arising Out of" Clauses   [TOC]

Claims "arising out of the dispute"):Victoria v. Sup.Ct., 40 Cal.3d 734 (1985) [injury outside the scope of employment]; c.f., Morales v. Club One, 2007 WL 4533534 (Cal.App.) [Non.Cite.]; Cione v. Foresters Equity Select Services, Inc., 58 Cal.App.4th 625 (1997); 24 Hour Fitness, Inc. v. Sup.Ct., 66 Cal.App.4th 1199 (1998);Rifkind & Stirling, Inc. v. Rifkind, 28 Cal.App.4th 1282 (1994) [punitive damages]; Vianna v. Doctor's Mgmt. Co., 27 Cal.App.4th 1186 (1994); Frederick v. First Union Secs., Inc., 100 Cal.App.4th 694 (2002) [shareholder derivative suit].

Although a broad form arbitration clause includes torts arising out of the contract, not every dispute clearly outside the contemplation of the parties and their intention in contracting is covered, e.g. assault; RN Solution, Inc. Catholic Healthcare West, 165 Cal.App.4th 1511 (2008); Valentine Capital Asset Management, Inc. v. Agahl, 174 Cal.App.4the 606 (2009)[securities transactions].

Note: For a list of claims, including tort, which "arise out of a dispute", see, Lopez v. Charles Schwab & Co., Inc., 118 Cal.App.4th 1224 (2004); Coast Plaza Doctors Hospital v. Blue Cross of Cal., 83 Cal.App. 4th 677 (2000); Efund Capital Partners v. Pless, 150 Cal.App.4th 1311).

Cross Reference Initiating Arbitration: Ch. IV-F-3-a: Broad Clauses

In Efund, the court expressly repudiated the Ninth Circuit case interpreting arbitration clauses in Mediterranean Enterprises, Inc. v. Ssangyong Corp., 708 F.2d 1458 (1983).

b. Disputes in "Disputes Over" Clauses   [TOC]

"Any dispute over the agreement" includes future disputes interpreting the terms of the award; Ajida Techs. v. Roos Instruments, Inc., 87 Cal.App.4th 524 (2001). Tortious conduct arising after plaintiff was terminated is within the scope of the arbitration clause; Buckhorn v. St. Jude Heritage Med.Grp., 121 Cal. App. 4th 1401 (2004) ["rooted in the parties' relationship.”]; Pleading an action in tort does not necessarily prohibit arbitration; Merrick v. WGAW, 130 Cal.App.3d 212 (1982).

c. Disputes "Concerning the Terms"  [TOC]

Medical Staff of Doctors Med.Ctr. in Modesto v. Kamil, 132 Cal.App.4th 679 (2005) [defamation not included in arbitration agreement]; Bono v. David, 147 Cal.App.4th 1055 (2007)[“controversy…involving construction or application of any provison;” defamation not included].

Practice: The test in determining whether a “broad clause” applies is the language of the clause itself and the terms under which the parties agreed to arbitrate.  Despite the public policy favoring arbitration, no one can be compelled to arbitrate if they did not agree to do so.  This policy applies not only to a party who allegedly is not bound by the contract but to the disputed issue[s] included within the contract.

In drafting an arbitration clause, consider a more specific clause: "all disputes arising out of or related to this agreement"; or, "all disputes arising out of the formation, execution, performance or termination of this agreement."

8. Narrow Clauses  [TOC]

A clause excluding specific issues or parties from arbitration is, obviously, construed as a "narrow" clause. The issue then becomes whether a particular item in dispute is within the scope of the clause. Bono v. David,  147 Cal.App.4th 1055 (2007) [defamation] reviews this issue extensively.

9. Conflicting Clauses  [TOC]

As a general rule, general clauses in contracts are superseded by specific clauses. Yet a subsqunet contract may not incorporate the arbitration clause of an earlier contract.  Depending on the facts, the subsequnt contract may operate independnetl or quaoiry as a ‘novaataion, a contrial term definaed as the “substitution of a new obligation for an existing one; CC 1530; The older contract is entirely abogataed or extingusished and the rights an dudtides are defined hy the new contract; Opri v. Birkhead, 2009 WL 931681 (Cal.App.) [Non.Pub.]

Cross Reference: Part I, Ch. IV, Initiating Arbitration

10. Multiple Clauses  [TOC]

Parties often redraft contracts containing arbitration clauses and the issue of incorporation of earlier documents into later ones becomes an issue. In Toyo de Baja Cal., Inc. v. Toyo Tire & Rubber Co., 2005 WL 1654998 (Cal.App.) [Non.Cite.] the court interpreted the word "superseded" literally as equivalent to "replace" whereas the Ninth Circuit interpreted the word as one of "incorporation"; Simula, Inc. v Autoliv, Inc., 175 F.3d 716 (1999).

The most common practice involving multiple clauses is the use of “integration clauses” to clarify subsequent contracts supersede all prior negotiations, agreements and representations and to underscore documents are separate and distinct.  The clause manifests an intent to avoid parol evidence;  City & Co of San Francisco v. Pacific Gas & Electric,  2007 WL 594470 (Cal.App.) [Non.Cite.].

See, Cross Reference: Part I, Ch. IV, Initiating Arbitration

11. Expired Contracts   [TOC]

A demand for arbitration exercised after the contract has expired will be honored; Ajida Techs., Inc. v. Roost Instruments, Inc., 87 Cal.App.4th 534 (2001). In Cairns v. Ventura Urgent Care Ctr. Med Corp., 2008 WL 756383 [Non.Pub.] the court noted that in Ajida the parties had specifically included arbitration in their contract as a forum for disagreements occurring after the expiration of the contract. There is a presumption in favor of postexpiration arbitration unless expressly negated or by clear implication.” Koch v. Compucredit Corp., 543 F.3d 460 (8th Cir. 2008)

12. Counter Claims  [TOC]

Once a cross-complaint has been filed in an action, the cross-complainant cannot dismiss the entire action by dismissing the cross complaint. If the Complaint alleges a contract providing for arbitration, the dismissal is ignored. The petition to compel arbitration stands apart from the action; Blake v. Ecker, 93 Cal.App.4th 728 (2001); Depierro v. Latchet, 2005 WL 615834 (Cal.App.) [Non. Pub.]

13. Remedial Limitations  [TOC]

In Omar v. Ralph's Grocery Co., 118 Cal.App.4th 955 (2004), the court applied the FAA rules (required by the terms of the arbitration clause) that remedial limitations in an arbitration clause are not a question of arbitrability, citing PacifiCare Health Systems, Inc. v. Book, 538 U.S. 401(2003). California law is unclear after Book, but in employment actions a remedial limitation in an arbitration clause is unconscionable under California law; Armendariz v. Foundation Psychcare Services, Inc., 24 Cal.4th 83 (2003). See, Ch. XVII, Revoking or Enforcing Arbitration Clauses,. Ch. XVII-C.

14. Attorney Fees: Petition to Compel  [TOC]

Although the language of CC 1717 awards fees to a “prevailing party”, a ruling on a petition to compel arbitration is not a decision on the merits, and attorney fees are not awardable; Lachkar v. Lachkar, 182 Cal.App.3d 641 (1986); R.M. Harris Co., Inc. v. Washington Int. Ins. Co., 2004 WL 2668260 (Cal.App.) [Non. Cite]; Green v. Mt. Diablo Hosp., 207 Cal.App.3d 63 (1989).

Without citing Lachkar, the court in Otay River Constructors v. San Diego Expressway, 158 Cal.App.4th 443 (2008) upheld the right of an attorney fee award to the prevailing party who had succesfully moved to deny the petition to compel arbitration. The court also held the motion to award fees qualified as an appealable order; CCP 1294 (e) [special order after final judgment].
See, Ch. XXII-C-6: Special Order After Judgment

In Acosta v. Kerrigan, 150 Cal.App.4th 1124 (2007) the court allowed attorney fees to a party who prevailed on a motion to compel arbitration based upon the language of the lease contract specifically providing for a fee award against any party who opposes arbitration.  In addition, and despite the language of the contract authorizing arbitration, the appellate court majority held the trial court had jurisdiction to award fees as an interim award; accord, Turner v. Schultz, 175 Cal.App.4th 974 (2009).

15. Statement of Decision Denying Petition to Compel  [TOC]

No statement of decision is required for denial of defendant's petition to compel arbitration; Maria P. v. Riles, 43 Cal.3d 1281 (1987); CCP 1291. A statement of decision resolves facts, and a rule of law is not a factual issue; Maria P.

16. Incorporation of Arbitration Service Rules  [TOC]

The parties may incorporate arbitration service provider Rules into an arbitration agreement. JAMS and AAA have prepared extensive rules applicable to their respective organizations. These Rules will apply unless overridden (trumped) by a specific statute; Dream Theater, Inc. v. Dream Theater, 124 Cal.App.4th 547 (2005); Rodriguez v. American Techs., Inc. 136 Cal.App.4th 1110 (2006).

But in Gilbert Street Developers, LLC v. La Quinta Homes, Inc.,174 Cal. App.4th 1185 (2009) an arbitration clause provided the parties would abide by AAA Rules “existing at the date of [an arbitration]”in the event of a dispute.  At the time the parties executed the contract, the AAA had no rule providing that arbitrators had jurisdiction to rule on their own jurisdiction. In later rules, AAA inserted a Rule that the arbitrators had jurisdiction to determine their jurisdiction.

At the time the dispute occurred, subsequent to the changed Rule, the moving party demanded that the arbitrator-not the court-determine jurisdiction of the dispute pursuant to the AAA Rules. Ordinarily the court, not the arbitrator, jurisdictionally determines whether a dispute is arbitrable unless the parties specifically assign that task to the arbitrator. The Gilbert Street court held that parties cannot incorporate Rules not in existence at the time they executed the contract and therefore the arbitrator lacked jurisdiction. 

17.  Duration of Arbitration Agreements  [TOC]

Arbitration agreements, like other contracts that do not specify a term of duration, are terminable at will after a reasonable time has elapsed; Reigelsperger, 40 Cal.th 574 ( (2007).

18. Collective Bargaining Agreements (CBAs) & Labor Code  [TOC]

The Worker's Compensation Act (WCA; Lab. Code 3200 et seq.) provides an exclusive remedy for employees injured in the course of employment. If the employee is a member of a union operating with management under a CBA, the Labor Code outlines a mechanism to resolve employment disputes and prevents an employee from filing an action at law for damages. The employee can nevertheless file an action on grounds not covered by the arbitration clause in the CBA; Wright v. Universal Maritime Service, 525 U.S. 70, (1998); Torrez v. Consolidated Freightways Corp., 58 Cal.App.4th 1247 (1997).

In Amalgamated Transit Union Local 1277 v. Los Angeles MTA, 107 Cal.App.4th 673 (2003) the court held that an employee could file a petition to compel arbitration on grounds the petition sought specific performance (in this case, an order that employer return the employee to work).

A Labor Code 132(a) discrimination claim is also outside the scope of WCA coverage.

 

Chapter XVII. Revoking or Enforcing Arbitration Clauses: State Court  [TOC]

If the arbitration agreement is valid and enforceable, the issues identified, and the relevant parties included, the court will order the controversy to arbitration "unless grounds as exist for the revocation of any contract;" CCP 1281; 1281.2.

A. Revocation of Agreement  [TOC]

Revocation of the arbitration agreement is based on general contract grounds: CCP 1281.2(b); (written agreements to arbitrate are valid and enforceable "save upon such grounds as exist for revocation of any contract.” This issue is resolved by the court unless the parties specifically agree to an arbitrator's decision; Rosenthal v. Grt. Western Fin. Servs. Corp., 14 Cal. 4th 394(1996). The courts have designated this role as one of "arbitrability", i.e., is the arbitration clause valid and enforceable based on the general law of contract.

As noted in earlier Chapters, the court separates the arbitration clause from the merits of the underlying contract in determining whether to order arbitration, i.e., "arbitrability." Confusion between revocation of the contract and revocation of the arbitration agreement has caused state and federal courts to repeatedly comment on the difference. The Supreme Court has held that the FAA mandates this distinction in state courts; Buckeye Check Cashing v. Cardegna, 564 U.S. 440 (2006). In Higgins v. Sup.Ct., 140 Cal.App.4th 1238) the Court of Appeal suggested the use of "clause" (arbitration) rather than "agreement" (contract) to distinguish between the two concepts.

Cross Reference: The FAA uses substantially comparable language, i. e., arbitration clauses are enforceable unless revocable on grounds of "law and equity;" 9 U.S.C. 2.

B. Procedural Law & Arbitrability  [TOC]

California courts have divided analysis of arbitration terms into categories of procedural and substantive law, characterized as "procedural" and "substantive" arbitrability. As noted later, these terms focus respectively on oppression among parties of unequal bargaining power or harsh or one-sided results.

According to the United States Supreme Court, procedural issues such as "waiver, delay or like defenses to arbitrability" are not subject to judicial determination but resolved by the arbitrator in federal court; Howsam v. Dean Wittter Reynolds, Inc., 537 U.S. 79 (2002). Under this doctrine, the phrase "procedural" arbitrability may be misleading because the Court also included "time limits, notice, laches, estoppel and conditions precedent to arbitrate within its ambit ." Estoppel and conditions precedent are, in some contexts, considered as substantive law.

Comment: The Howsam rule is not identical with California law. California courts have repeatedly stated different rules. Neither collateral estoppel nor conditions precedent involve the validity of the arbitration agreement and are not a basis to "revoke" on legal grounds although arguably revocable on equitable grounds, or the court may refuse to “enforce” an arbitration clause. If the parties choose FAA rules, or the transaction is in interstate commerce, the question is whether preemption applies.

There is no federal policy conducting arbitration under a specific set of procedural rules unless state law conflicts with the objectives of federal law; Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468 (1989). Volt appears to hold that a state can institute its own procedural rules as long as the objectives of the FAA are served.

No jury trial is required on the issue of "arbitrability" and federal procedural rules (FAA) do not bind California state courts unless the arbitration clause specifically applies them; Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2005); Rosenthal v. Great Western Fin. Securities Corp. 14 Cal.th 494 (1996); Sanders v. Kinko's, Inc., 99 Cal.App.4th 1106 (2002); Siegel v. Prudential Ins. Co. of America, 67 Cal.App.4th 1270 (1998) ["manifest disregard" federal rule inapplicable]; Muao v. Grosvenor Properties, Ltd, 99 Cal.App.4th 1085 (2002) [appealable order].

Research Note: "Procedural Arbitrability" in this Chapter focuses on the statutory procedural provisions that affect arbitration. Not included in this Section is the role of the procedural prong of "unconscionable" arbitration clauses in contracts; Discover Bank v. Sup.Ct., 36 Cal.4th 148 (2005); Armendariz v. Foundation Health Psychcare Services, 24 Cal.4th 93 (2000); CC 1607. This issue is discussed under Substantive Law & Arbitrability, this Chapter..

See, Ch. XVII-B-C.

1.  Statute of Limitations   [TOC]

The statute of limitations is an affirmative defense to the merits of the claims and is a decision for the arbitrator; Wagner Const. Co. v. Pacific Mechanical Corp., 41 Cal.4th 19 (2007); Santangelo v. Allstate Ins. Co., 65 Cal.App.4th 804 (1998) [UM case]; Zamora v. Lehman, 186 Cal.App.4th 1(2010).
But see, Kennedy, Cabot & Co., v. NASD, Inc., 41 Cal.App.4th 1167 (1996) [NASD]; Pearson Dental Supplies, Inc. v. Sup.Ct., 166 Cal.App.4th 71 (2008). Review granted and reversed.  See, Ch. XXIII: Awards

Note: The statute of limitations is different in judically ordered arbiration; CCP 1141.17.  See, Ch. X-V.

Cross Reference: the federal rule is Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) and the statute of limitations is probably an issue for the arbitrator. See, Part I, Ch. IV-H-3, Statute of Limitations.

In Martinez v. Master Protection Corp., 118 Cal.App.4th 107 (2004) the court held that an accelerated time limitation to file a claim in an arbitration clause is incompatible with statutory limitations and disables Claimant from effectively vindicating statutory rights as required by Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).  But Pearson Dental Supplies, Inc,  166 Cal.App.4th 71(2008)[FEHA] holds Martinez is not a per se rule and in some circumstances a reasonable time within which a party must file a demand for arbitration pursuant to an arbitratin clause is enforceable.  Pearson: Review granted and reversed; See, Ch. XXIII

Cross ReferenceThe Martinez  decision is apparently consistent with a Ninth Circuit decision employment case; Davis v. O’Melveny & Myers, 485 F.3d 1066 (9th Cir. 2007. In Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002) the arbitration clause provided for an accelerated time to bring a claim inconsistent with the statutory time frame. According to the court, this compromised Claimant's ability to vindicate statutory rights; cf. Soltani v. Southern Life Ins. Co., 258 F.3d 1038 (9th Cir. 2001.

In the context of litigation, a cross-complaint filed subsequent to expiration of the statute of limitations is permitted; CCP 431.70; Sidney v. Sup.Ct., 198 Cal.App.3d 710 (1988). The rationale is waiver by the plaintiff who initially filed the Complaint. In arbitration, this rule would also apply, permitting Respondent to file cross-claims against a Claimant after the statute of limitations has expired.

Comment: Determing whether amended claims, or cross-claims, in arbitration are timely may also depend on the Rules of the arbitration service provider.

Note: Expiration of the statute of limitations is often determined by mere calculation, but the appropriate time line is frequently in dispute or waiver is alleged. CCP 583.360(a), the mandatory five year statute of limitations is dispositive but modified by a stay of a pending action; Brock v. Kaiser Foundation Hosps., 10 Cal.App.4th 1790 (1992) CCP 583.340(b).

When does the statute begin to run in arbitration? In Spear v. California State Auto. Assn., 2 Cal.4th 1035 (1992) the court held accrual of the cause of action does not occur, and the statute does not run, until one party has refused to submit to arbitration; CCP 1281.2. Spear is a UM case and involves insurance as distinct from statutory or common law causes of action.  The insurance policy included a time limit for initiating arbitration authorized by Ins. Code 11580.2. Wagner applies the same rule, i.e., the statute does not start running until the opposition refuses to arbitrate.  On that date, the statute is measured by the date on the underlying obligation.  In contract-four years.

A petition to compel arbitration must be brought within four years after the party to be compelled has refused to arbitrate.; Spear.  A demand for arbitration must be brought within a reasonable time unless a statute requires a specific time or the terms of the contract require a specific time.  A “reasonable” time varies with the circumstances and is governed, in part, by the rules in St.Agnes Med.Ctr. v. PacifiCare of California, 31 Cal.4th 1187 (2003).

See, Santengelo v. Allstate Ins. Co., 65 Cal.App.4th 804 (1998) [UM case].

New in 2007:The California Legislature has added CCP 1281.12 applicable to an arbitration clause that requires a party demanding or initiating arbitration to do so “within a period of time.” Thus, “the commencement of a civil action by a party within that time tolls the time in the arbitration agreement with respect to that controversy “…from the date the civil action is commenced until 30 days after a final determination by the court that the party is required to arbitrate…or 30 days after the final determination of the civil action that was commenced and initiated the tolling, whichever comes first.”

Note: CCP 1281.2 applies to self-executing arbitration clauses containing specific time periods in which to demand arbitration.  In Wagner, above, the parties had not agreed to any specific time frame.

2. Laches  [TOC]

In St. Agnes Med. Ctr. v. Pacificare of Cal., 31 Cal.4th 1187 (2003) the court reviewed the judicial role in assessing waiver of the right to arbitrate. The statute of limitations and laches are legal and equitable doctrines, and, in the context of arbitration, signify the loss of the right to arbitrate rather than relinquishing a known right.

See, This Chaptaer,Waiver; F.

3. Forum Selection Clause  [TOC]

a. Arbitration Forum Clause   [TOC]

Forum selection is common in contractual litigation disputes, usually identifying the situs for the trial of a civil action. In arbitration, the term is used to identify an arbitrable forum rather than a judicial forum, but the parties in arbitration can also select the location of the arbitration in the absence of a forum selection clause in the agreement.

b. Contractual Forum Selection Clause  [TOC]

Forum selection clauses are analyzed comparable to standard contract law. Citing Discover Bank v. Sup.Ct., 36 Cal.4th 148 (2005), the court in Aral v. Earthlink, Inc.,134 Cal.App.4th 543 (2005) held that in class action consumer contracts a forum selection clause is subject to challenge as unconscionable-despite the absence of a cause of action for fraud. A forum selection clause identifying a location distant from California is unenforceable as an unreasonable application of the law; Aral.

A contract containing an arbitration clause may identify the particular arbitration forum, i.e., NASD, NYSE, JAMS, AAA. All these organizations have drafted rules to administer an arbitration. If the rules violate state law, the court will not enforce the arbitration clause; Azteca Const. Co v. ADR Consulting, Inc., 121 Cal.App.4th 1156 (2004). If an arbitration service provider refuses to administer the arbitration, the court cannot select an alternative forum; Jackson v. Health Net Ins. Co., 2004 WL 2307113 Cal.App.) [Non. Cite]. Arbitration clauses identifying a specific forum for arbitration must be respected. The court cannot select an alternative forum; Martinez v. Master Protection Corp., 118 Cal.App.4th 107 (2004).

In Alan v. Sup. Ct., 111 Cal.App.4th 217 (2003) the court held that if the NASD and NYSE refuse to arbitrate a broker-customer dispute, and the forum is an "integral part" of the arbitration agreement, the court must try the case. If not, and the security industry rules permit arbitration at a location of their choosing, the arbitration may be conducted in another state unless the alternative forum is legally inconvenient for other reasons. Contra, Interactivate v. Cubic Transportation Systems, 2007 WL 178429 (Cal.App.) [Non.Cite.].

Jevne v. Sup.Ct., 35 Cal.4th 935 (2005) may have undermined Alan. Citing the doctrine of conflict preemption, the California Supreme Court held the FAA preempts California disclosure and disqualification rules for arbitrators in NASD cases.

In Parrish v. Cingular Wireless LLC, 2005 WL 2420719 (Cal.App.) [Non. Cite.] the court drew a distinction between a forum selection clause and a contractual arbitration clause in the context of non-signatories to the arbitration agreement. A forum selection clause may be enforced against a non-party closely connected to the contractual relationship; Lu v. Dryclean-USA of Ca., Inc., 11 Cal.App.4th 1490 (1992). A party who sues in a representative capacity is bound by the terms of the arbitration agreement, including the forum selection clause; Net2Phone, Inc., v. Sup.Ct., 109 Cal.App.4th 583 (2003).

See, Ch. XVI-F-5, Arbitrable Parties & Issues.

Note: Aside from their adhesive nature (Postal Instant Press, Inc. v. Sealy, 43 Cal.App.4th 1704 [1996]), franchise agreements are usually challenged on grounds of an inappropriate forum-particularly for the franchisee; Independent Ass'n of Mailbox Owners, Inc. v. Sup.Ct., 133 Cal.App.4th 396 (2005); Winter v. Window Fashions Professionals, Inc., 166 Cal.App.4th 943 (2008). Despite the apparent unfairness of conducting arbitration in a distant location, the court warned of potential FAA preemption in Stirlen v. Supercuts, Inc., 51 Cal.App.4th 1519 (1997). Bolter v. Sup. Ct, 87 Cal.App.4th 900 (2001) recommended the court sever the clause if unfair.

Cross Reference: Bradley v. Harris Research, 275 F.3d 884 (9th Cir.2001); Doctor's Assocs. v. Hamilton, 150 F.3d 157 (2d Cir. 1998). Bradley holds California forum selection clauses in arbitration agreements are preempted in federal court. Under the FAA, fraud in the forum selection clause vitiates enforceability; Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974); Moses v. Business Card Express, 929 F.2d 1131 (6th Cir. 1991).

4. Forum Non Conveniens  [TOC]

CCP 410.30 states the litigation rule for forum non conveniens (FNC) in civil actions and standards for its application are reviewed in Stangvik v. Shiley, Inc., 54 Cal.3d 744 (1991); Olinick v. BMG. Ent., 138 Cal.App.4th 1286 (2006).

In Roulier v. Cannondale, 101 Cal.App. 4th 1180 (2002) the court extensively discusses the doctrine of forum non conveniens. But in the context of arbitration, the rationale may differ if the court finds the FNC clause unconscionable; Alan v. Sup.Ct., 111 Cal.App.4th 217 (2003). Such a finding is severable from the balance of the arbitration clause; Bolter v. Sup.Ct., 87 Cal.App.4th 900 (2001) [franchise contract].

Resolution may depend on whether the arbitration clause, or the contract, was negotiated or adhesive; Olinick. The rule may differ if the arbitration clause requires arbitration under the FAA despite a transaction in California. Strictly speaking, forum non conveniens is not a "ground" for revocation of contract under the FAA; Baber v. Quizno's, 2006 WL 3072394 [Cal.App. Non.Cite].

Comment: Baber is a Non Cite case and involves an alleged breach of a franchise agreement. These contracts are adhesive, arguably involving an unconscionable arbitration agreement-but severable; Bolton.

Cross Reference: As above, the Ninth Circuit upheld the same forum selection clause provision on the ground Bus. & Prof. Code 20045.5 [venue restriction] is preempted by the FAA; Bradley v. Harris Research, Inc., 275 F.3d 884 (2001). The court apparently ignored Jones v. GNC Franchising, Inc., 211 F.3d 495 (9th Cir.2000).

5. Choice of Law Clause  [TOC]

Two issues govern choice of law clauses: 1) Does the FAA preempt a state choice of law provision?  If the parties specifically designate a state choice of law, the FAA does not pre empt even if the decision results in a stay of arbitration unlesss a particular provision of state law contravenes the goals of the FAA; Volt;  Mount Diablo Med. Ctr. v. Health Net of Cal., Inc., 101 Cal.App.4th 711 (2002); CCP 1281.2; Cronus Investments v. Concierge Services, 35 Cal.4th 376 (2005); 2) is the clause broad enough to include the state law of arbitrability; the California Supreme Court subsequently held a generic choice of law should be interpreted according to the Restatement of law as discussed in Nedlloyd Lines B.V. Sup.Ct., 3 Cal.4th 459 (1992); Discover Bank v. Sup.Ct., 36 Cal.4th 148 (2005).

The next issue (3) is: whether the language of the choice of law clause includes state substantive law, state procedural law, or decisional law of the designated state; Yuen v. Sup.Ct. 121 Cal.App.4th 1133 (2004). According to Mount Diablo, a generic choice of law clause includes state substantive and procedural law despite the agreement calling for FAA rules.

The California Supreme Court remanded its Discover Bank decision and the Court of Appeal held out-of-state law controls; Discover Bank v. Sup. Ct., 134 Cal.App.4th 886 (2005) [Hrg. denied]. Klussman v. Cross Country Bank, 134 Cal.App.4th 1283 (2005) reached the opposite conclusion on a similar state of facts but no petition for hearing was sought. According to the Klussman court, the Court of Appeal decision in Discover Bank enforced the choice of law clause on grounds the plaintiffs had only pled out-of-state causes of action.

Rodriguez v. American Techs., 136 Cal.App.4th 1110 (2006) holds that an arbitration clause identifying FAA rules governing the arbitration, as distinct from a choice of law clause, prevails if the parties agreed to this selection. In effect, this is a choice of rules rather than a choice of law.

Assuming there is a reasonable basis to select out-of-state law, the ultimate issue is whether California has a "material interest" in refusing to enforce the clause; Discover Bank.

Note: For an extensive discussion of Choice of Law rules in general, see ABF Cap. Corp. v. Grove Properties Co., 126 Cal.App.4th 204 (2005).

Generally speaking, the trial court decides application of a choice of law clause in a contract at the petition to compel arbitration, but if the arbitration clause assigns this decision to the arbitrator, a failure to comply with the clause, or misapplication of the clause, is not grounds for appeal; Marsch v. Williams, 23 Cal.App.4th 238 (1994).

Cross Reference: In federal court, a choice of law clause and an arbitration clause have caused a lack of clarity. The conflict revolves around two competing policy goals: 1) state courts must enforce arbitration clauses under the FAA; 2) the parties cannot subvert the arbitrator's powers. See, Part I, Choice of Law. In civil actions, forum selection clauses are "indispensable" in business transactions; Scherk v. Alberto-Culver Co., 417 U.S. 516 (1974). For a federal case interpreting a choice of law clause and its application under state substantive law, see, Twin Galleries LLC v. Media Arts Grp., 476 F.3d 598 8th Cir. 2007).

Practice: In drafting arbitration clauses, the parties must consider incorporation of multiple agreements, conditions precedent, dispute resolution methods and parties bound by the contract.  Are there any third parties who have contracts with the contracting parties? If so, do they have arbitration clauses; are agents personally bound; is there an indemnity agreement? Is there a sub contract, and if so, does it bind the parties and third parties; Best Interiors, Inc. v. Millie & Severson, Inc, 161 Cal.App.4th 1320 ( 2008).

Cross Reference: Ch. III-B-15: Drafting Arbitration Clauses 

6. Severance of Arbitration Clauses  [TOC]

That an illegal or unenforceable term in a contract exists does not necessarily deny the right to arbitrate. A court can sever these terms unless they permeate the contract. Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000) permits severance in the "interest of justice" to prevent an undeserving benefit to one party or, unless condoning an illegal scheme, an attempt to preserve the contractual relationship;  Oakland-Alameda County Coliseum Authority v. CC Partners, 101 Cal.App.4th 635, (2002);  v. Garden Grove Medical Group; 100 Cal.App.3d 698 (1980).

Cross Reference: Beynon Twin Galleries, LLC v. Media Arts Grp., Inc., 476 F.3d 598 (8th Cir. 2007) enforcing severance clause.

In some cases, the agreement specifically allows the court to sever any unenforceable arbitrable term, but if the contract prohibits a specific term, the court must defer to the terms of the clause; Cohen v. DIRECTV, Inc., 142 Cal.App.4th 1442 (2006) and cases cited therein..

Comment: severance of a term prohibiting class actions is discussed in this Chapter: Class Actions, B-11.

7. Contractual Remedies  [TOC]

As noted earlier, the parties can mutually agree on contractual limitations unless the terms render the contract unconscionable. Unilateral limitations by one party are the most prominent example.  See, this Chapter, C-6-b; Ch. XVI-F-13.

8. Conditions Precedent   [TOC]

The parties may contract for specific acts or events to occur as a condition precedent to arbitration, and, unless legally excused, the terms are enforceable; or, an alternative theory is waiver, i.e., failure to make a timely demand for arbitration; Platt Pacific, Inc. v. Andelson, 6 Cal.4th 307 (1993): "When the parties have agreed that a demand for arbitration must be made within a certain time, that demand is a condition precedent that must be performed before the contractual duty to submit the dispute to arbitration arises; Platt @313; Kahn v. Chetchi, 101 Cal.App.4th 61 (2002).

In Nyulassy v. Lockheed Martin Corp., 120 Cal.App.4th 1267 (2004) an employee was required to mediate with the employer as a condition precedent before seeking arbitration.

In S.E.I.U. et al. v. Cupertino School Dist., 131 Cal.App.4th 985 (2005) [depublished] the court excused a timely, but procedurally late, compliance with a contractual condition precedent. The issue involved an arbitration under a CBA.

Contracts requiring mediation prior to arbitration may contain enforceable arbitration clauses in the event the mediation is unsuccessful; Leamon v. Krajiewcz, 107 Cal.App.4th 424 (2003). Ralph's Grocery Co. v. Massie, 116 Cal.App.4th 1031 (2004) [labor code; depublished].

In residential real estate transactions between buyer and seller, the contract frequently requires a party to mediate before filing a civil action-or arbitration; Van Slyke v. Gibson, 146 Cal.App.4th 1296 (2007).  Non compliance risks the loss of attorney fees; Blackburn v. Charnley, 117 Cal.App.4th 758 (2004).

See, XVII-C-5: Real Estate Contracts

If the party files a lis pendens pursuant to the contract permitting this collateral proceeding, mediation (or arbitration) is not mandated (at least until the condition precedent is resolved); G & S Assisted Care-Valley Vista, LLC, 2005 WL 615644 (Cal.App.) [Non. Cite.]. Blackburn.

In California, conditions precedent in a contract are typically identified as substantive law, not procedural. Yet Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) apparently interprets "conditions precedent" as an issue for the arbitrator. Conditions precedent ought to be construed by the court although satisfaction of a condition precedent in a contract applies to the merits of the case and are irrelevant in determining validity and enforcement of an arbitration clause. Perhaps the Court was referencing conditions precedent in the arbitration clause, i.e., the parties must conduct mediation before filing litigation or initiating arbitration.

See, ,Ch. XVII-C-5; Real Estate Contracts

9. Summary Judgment  [TOC]

a. Arbitrability  [TOC]

The California Supreme Court has recommended that a party seek an order to arbitrate and a stay of litigation as the initial procedural step rather than filing summary judgment; Charles J. Rounds Co. v. Jt. Council of Teamsters No. 42., 4 Cal.3d 888 (1971). No jury is required, arbitrability is a question of law; St. Agnes Med. Ctr. v. Pacificare of Cal., 31 Cal.4th 1187 (2003); Rosenthal v. Grt. Western FSC, 14 Cal.4th 394 (1996).

In Johnson v. Siegel, 84 Cal.App.4th 1087 (2000) the court reversed summary judgment in favor of defendant after plaintiff filed an action without seeking arbitration as required by the contract. The court in Johnson held that summary judgment is not res judicata and the plaintiff could file a petition to compel arbitration.

Charles Rounds has caused difficulty. In St. Agnes Medical Ctr. v. PacifiCare of California, 31 Cal.4th 1187 (2003) the court attempted to extricate itself by holding that filing a lawsuit, despite an arbitration clause in the underlying contract, does not constitute a waiver of the right to arbitrate. Waiver applies only to the merits of the suit. Two Court of Appeals case appear to conflict with each other. 24 Hour Fitness, Inc. v. Sup. Ct., 66 Cal.App.4th 1199 (1998) holds that a plaintiff who has signed an arbitration clause and files litigation has repudiated the agreement and summary judgment is proper.

Kalai v. Gray, 109 Cal.App.4th 768 (2003) disagrees, holding that summary judgment is a question of law, not the merits, and the successful moving party can proceed with arbitration or litigate.

In Abrahamson v. Juniper Networks, Inc., 115 Cal.App.4th 638 (2004) the court held that a party could take an immediate appeal from an order compelling arbitration after the trial court had ordered summary judgment on the claim.

Cross Reference: Federal courts entertain motions for summary judgment in diversity cases to rule on issues of arbitrability (9 U.S.C. 3/4), or determine the existence/validity of an arbitration clause. Although the FAA requires a jury if the arbitration clause is in issue, as a practical matter a motion for summary judgment is a question of law for the court.
In non diversity cases the plaintiff initially files in federal court, and the defendant files a motion for summary judgment-and a motion to compel arbitration and stay litigation-one court has ruled this constitutes a waiver; Kahn v. Parsons Global Services, LTD, 521 F.3d 421 (D.C. Cir. 2008).)
Very questionable ruling and the Kahn court cites cases in which the parties engaged in pre trial discovery; See, Ch. III-B-120-c-3.

b. Arbitration   [TOC]

In Schlessinger, Rosenfeld, Meyer & Sussman, 40 Cal.App. 4th 1096 (1995) the arbitrator awarded summary judgment to a party based on the evidence presented and prior to an arbitration on grounds discovery was adequate for the arbitrator to rule. The court noted that CCP sections outside CCP 1280 et seq. do not necessarily apply in arbitration, and as long as discovery is concluded the summary judgment is appropriate. In Reed v. Mutual Service Corp., 106 Cal.App.4th 1359 (2003) the court approved NASD eligibility rules (comparable to a summary judgment) authorizing arbitrators to dismiss a claim prior to arbitration.

Cross Reference:  See, Ch. III-B-12-c-3): Sherrock Bros. v. DaimlerChrysler, 2008 WL 63300 (3d Cir. 2008) [Non.Pub.]  is in accord and cites several cases in support of the result.

10. Costs and Fees  [TOC]

CCP 1284.2 requires all parties to an arbitration to share costs but in employment arbitration the employer cannot compel claimant to pay fees or costs not chargeable in litigation; Armendariz v. Foundation Health Psychcare Services, Inc. 24 Cal.4th 93 (2003). To do so would impair the ability of a claimant to vindicate statutory rights. If this is the only unenforceable provision of the arbitration clause, the court may sever the clause requiring the employee to pay; Gutierrez v. Autowest, 114 Cal.App.4th 77 (2004)[arbitration clause collateral to the purpose of arbitration];  Independent Ass’n of Mailbox Center Owneres, Inc. v. Sup.Ct., 133 Cal.App.4th 396 (2005); McManus v. CIBC World Markets Corp., 109 Cal.App.4th (2003). Silence on the issue of costs in the arbitration agreement is not grounds for denying a petition to compel arbitration; Armendariz.

In Boghos v. Certain Underwriters at Lloyd's of London, 36 Cal.4th 495 (2005) the California Supreme Court clarified the imposition or allocation of costs in arbitrations other than employment. Cost shifting under Armendariz has not been expanded beyond employment to common law claims, and arbitration costs are allocated under CCP 1284.2 requiring each party to bear costs and fees pro rata absent agreement otherwise.

Practice: Federal courts have confronted the issue of imposing  arbitration costs on one party and have reached conflicting results.  Armendariz solves the problem in employment cases but in other categories the costs of arbitration may subvert the right of one party by imposing an inordinate financial burden, labeled by one court as an element of substantive arbitrability; Higgins, 140 Cal.App. 4th 1250 ( 2006) .  Morales v. Club One, 2007 WL 4533534 (Non.Pub.) [Non.Cite.] requires the claimant to produce evidence of financial inability to pay.

The arbitration clause, or the underlying contract, may authorize costs and fees awarded to the prevailing party. In Trend Homes, Inc. v. Sup.Ct., 131 Cal.App.4th 950 (2005) the arbitration clause provided for a referee to resolve disputes between the parties. The court recommended the trial judge determine an appropriate calculation of costs.

See, Ch. XXI, Awards

11. Class Actions & Classwide Arbitration  [TOC]

Keating v. Sup. Ct., 31 Cal.3d 584 (1982) is the seminal case in California (overruled on other grounds; Southland Corp. v. Keating, 459 U.S. 1101 [1981]) and approved, in principle, arbitration of classwide arbitration in state court. The FAA does not preempt state law permitting classwide arbitration unless it defeats the objectives of the FAA; Blue Cross of California v. Sup.Ct., 67 Cal.App.4th 42 (1998). Blue Cross holds that class actions and arbitration are compatible and the court may so order; Sanders v. Kinko's, Inc., 99 Cal.App.4th 1106 (2002).

Discover Bank of California, 36 Cal.4th 148 (2005) clarifies the role of class actions in the context of arbitration in the format of classwide arbitration in consumer cases. Citing Blue Cross, the California Supreme Court confirmed that in permitting classwide arbitration the FAA does not preempt California law. And, said the court, one party may not prohibit another party from participating in consumer classwide arbitration despite a waiver of consolidated claims in the arbitration agreement. Arbitration agreements containing a waiver of class action clause are unconscionable under California general law,with some exceptions. Discover Bank confirms the right of multiple consumers to participate in classwide arbitration if they elect to do so; Cohen v. DirecTV, Inc.,142 Cal.App.4th 1442 (2006).

In Gentry v. Sup.Ct., 42 Cal.4th 443 (2007) the court also prohibited classwide waivers  in employment cases alleging employer failure to pay overtime, except “in some cases.”  The court also discussed the role of procedural unconscionability in arbitration clauses, and held, also in the employment context, that “opt out” agreements do not necessarily insulate a challenge to procedural unconscionability. In Franco v. Athens Disposal Co., Inc., 171 Cal.App.4th 1277 (2009) [modified; no change in judgment] the court applied Gentry to meal and rest periods pursuant to Labor Code 512  & 226.7 and California Wage Orders; Sanchez v. Western Pizza Enterprises, Inc., 172 Cal.App.4th 154 (2009) [Labor Code violations].

In Romero v. Sup.Ct., 184 Cal.App.4th 825 (2010) the court distinguished the analysis of employment cases in Gentry and consumer cases exemplified in Discover Bank.

See, Weblog, September 1, 2007

Cross Reference: A claim that the arbitration agreement itself is unconscionable is a judicial question;  Snowden v. Checkpoint Cashing, 290 F.3d 868 (8th Cir. 2004). But an objection that a collective action waiver in an arbitration clause is unconscionable is an objection to procedure, not an objection to arbitration and is not a “gateway” issue; Davis v. ECPI College of Technology, L.C. 2007 WL 840506 (4th Cir. 2007) [Non.Pub. [“procedural aspects of the arbitration” are for the arbitrator]; Dockser v. Skchwartzberg, 433 F.3d 421 (4th Cir. 2006)].

The  Ninth Circuit, without citing any federal case, adheres to Discover Bank and finds waiver of classwide arbitration unconscionable and not preempted; Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007); cf., Skirchak v. Dynamic Resources Corp., 508 F.3d 49 (1st Cir. 2007).

Cross Reference: Ch. IV-H-8: Class Actions  & Classwide Arbitration

Decisional California law on classwide arbitration actions is in flux: Aral v. Earthlink, Inc., 134 Cal.App.4th 544 (2005) [invalidating class action based on forum selection clause]; Szetela v. Discover Bank, 97 Cal.App.4th 1094 (2005) [invalidating credit card agreement prohibiting class actions]; Klussman v. Cross Country Bank, 134 Cal.App.4th 1283 (2005) [California choice of law rules trump Delaware law in consumer case]; Discover Bank v. Sup.Ct., 134 Cal.App.4th 886 (2005) [on remand, the Delaware choice of law clause prevails over California law]; Jones v. CitiCorp., Inc., 135 Cal.App.4th 1491 (2006) [credit card consumer class action; [Rev.Grtd. & transferred to Court of Appeal]; ** Independent Assn. of Mailbox Center Owners, Inc. v. Sup.Ct., 133 Cal.App.4th 396 (2005 (franchise contracts); Murphy v. Check’n Go of California, Inc., 156 Cal.App.4th 138 (2007­) [wage & hours, citing Gentry]. Konig v. U-Haul Co. of California, 145 Cal.App.4th 1243 (2006) (employment contracts [Rev.Grtd.; reversed; and ordered to trial court; 2008 WL 162766  (Cal.App.) [Non.Cite].

See, Forum Selection Clauses, this Chapter, B-3.

According to Blue Cross, the California Legal Remedies Act (CLRA; CC 1750 et seq.) provides consumers with authority to engage in classwide arbitration without reference to CCP 382, the general class actions statute. In Broughton v. Cigna Healthplans of Cal., 21 Cal.4th 1066 (1999) the court held that the form of class actions permitted in the CLRA preclude arbitration of its injunctive provisions applicable to the general public but damage provisions are severable and subject to arbitration.

Cross Reference: Ting v. AT & T, 319 F.3d 1126 (9th Cir. 2003) holds that the CLRA is preempted by the FAA.

Cruz v. PacifiCare Health Systems, Inc., 30 Cal.4th 303 (2003) held that claims for restitution and disgorgement under the unfair competition statutes (Bus. & Prof. 17200 et seq.) and false advertising (Bus. & Prof. 17500) are subject to arbitration whether brought privately or as a class, but injunctive relief on behalf of the public is not subject to arbitration. Claims seeking restitution or disgorgement are severable from the injunctive claim; Cruz.

In Mitchell v. AFCA, 99 Cal. App.4th 1345 (2002) the court held that subsequent modification of a consumer contract must be in writing and signed prior to becoming effective, cf. Jones v. CitiCorp., Inc., 135 Cal.App.4th 1491 (2006) [Rev.Grtd.& trasferred to Court of Appeal].**

In actions arising under the preemptive scope of the FAA in state court (either by a contract in interstate commerce or arbitration rules utilizing the FAA), the United States Supreme Court has held that the arbitrator-not the court-must determine whether the contract prohibits class actions (or classwide arbitration) if the arbitration clause is silent on the issue; Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003). Cable Connection v. DIRECTV Inc., 44 Cal.4th 1334 (2008); Garcia v. DIRECTV, Inc.,115 Cal.App.4th 297 (2004) are in accord with the right of the arbitrators to determine whether an arbitration clause silent on the issue of classwide arbitration is arbitrable.

Cross Reference: According to the U.S. Supreme Court, interpretation of contractual terms is not a "gateway" issue for the court. Absent a prohibition of classwide arbitration, the arbitrator must determine the intent of the parties because the validity of the arbitration agreement or its applicability to the underlying dispute is not in issue; Green Tree; Pedcor Mgmt. Co., Inc. Welfare Benefit Plan v. Nations Personnel of Texas, Inc., 343 F.3d 355 (5th Cir. 2003). Discover Bank addresses this issue but does not resolve it.

In Roe 1 v. Bijou Group, Inc., 2005 WL 914755 (Cal.App.) [Non. Cite.] the court discussed compelling non signatories to join class actions. In Independent Ass'n. of Mailbox Center Owners, Inc. v. Sup.Ct., 133 Cal.App.th 396 (2005) the court approved classwide arbitration in franchise agreements.

Comment: Although Discover Bank concludes that the FAA does not preempt California law in the context of classwide arbitration, Green Tree Fin. Corp. v. Bazzle, 534 U.S. 444 (2003) appears to be directly in conflict. Class actions frequently involve diversity of citizenship (jurisdiction) and the parties are engaged in interstate commerce (FAA), thereby providing a basis of removal to federal court and eliminating California procedural law; Fidelity Federal Bank, FSB v. Durga Ma Corp., 386 F.3d 1306 (9th Cir.2004). If jurisdictional or statutory requirements are not satisfied, and the class action remains in California, state law will presumably govern (absent an enforceable choice of law clause identifying another jurisdiction); Cronus Investments, Inc. v. Concierge Services, 35 Cal.4th 376 (2005).

Discover Bank is not based on the procedural law of consolidation but on the theory that classwide arbitration vindicates statutory rights, i.e., substantive law of California as reflected in Civ. Code 1668, explaining substantive and procedural law as not “static concepts.”] If a federal court accepts Discover Bank's characterization of classwide arbitration as substantive law, the waiver clause is unenforceable. A federal court might reject Discover Bank's reformulation of procedural law and conclude the FAA preempts state law, thereby rejecting the California interpretation.

Cross Reference: Under the newly enacted Federal Fair Class Action Act of 2005 (28 U.S.C. 1711 et seq.) a significant number of state cases are subject to removal to U.S. District Courts and an application of the Green Tree rule. Another problem: federal courts formerly did not permit consolidation of arbitration claims with multiple parties, lacking procedural tools in the FAA; Champ v. Siegel Trading Co., 55 F.3d 269 (7th Cir. 1995);Weyerhaeuser Co. v. Western Seas Shipping Co., 743 F.3d 635 (9th Cir. 1984). Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) may have eliminated this objection.

Green Tree and Garcia v. DirecTV, 115 Cal.App.4th 297 (2004) require the arbitrator to decide whether an enforceable class wide agreement exists, its validity, and application of its terms to the underlying dispute, all issues not raised in Discover Bank. If some of the causes of action are not arbitrable, the arbitrator must determine whether to proceed with class wide arbitration. Presumably the arbitrator would return non-arbitrable cases to the court. Whether the court should order discovery initially to determine the basis for class certification is discretionary with the court; Elias v. Sup. Ct., 2005 WL 605716 (Cal.App.) [Non. Cite.]).

The conventional issues in class action litigation, other than CRLA, are duplicated in classwide arbitration, i.e., notice, selection of counsel, numerosity, typicality and superiority; CCP 382. Due process is an issue but rejected in Rifkind & Sterling, Inc. v. Rifkind, 28 Cal.App.4th 1282 (1994) [no state action].

As noted above, a related question is: who decides class certification once the arbitrator has interpreted the arbitration agreement as requiring class action status? Young v. Lowe's HIW, Inc., 2005 WL 995561 (Cal.App.) [Non.Cite.] holds that an arbitration agreement governed by the FAA authorizes the arbitrator to decide certification. This decision arguably conflicts with Sproul v. Oakland Raiders, 2005 WL 1941388 (Cal.App.) [Non.Cite.] holding the court must decide preemption as a threshold issue. Sproul holds that the court decides certification and Bazzle & Garcia only address interpretation of the contract.

Cross Reference: Under basic jurisdictional principles, federal courts must apply state substantive law in diversity cases. In Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (2003) the Ninth Circuit found a class action waiver unconscionable under Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000) because the employee had no meaningful opportunity to "opt out" of the agreement within the prescribed three days permitted by the arbitration clause in the contract. In Gentry v. Sup.Ct. 42 Cal.4th 443 (2007) the employee had thirty days to "opt out” but according to the California Supreme Court, that provision does not necessarily translate into the absence of procedural arbitrability.

The vast majority of state and federal courts reject the California Supreme Court rule in Discover Bank. The court acknowledges this fact in a footnote. For an example of federal court analysis in an area of questionable business practices among multiple lenders (payday loans) see, Jenkins v. First American Cash Advances of Ga., 400 F.3d 868 (11th Cir. 2005).

Comment: Banning class actions mailed to consumers in a "bill stuffer" is adhesive and procedurally unconscionable (lacks mutuality of remedy) but not necessarily substantively unconscionable; Discover Bank v. Sup.Ct., 134 Cal.App.4th 836 (2005); accord, Jones v. CitiCorp., 135 Cal.App.4th 1491 (Rev.Gtd. and transferrred to Court of Appeal to reconsider in light of Gentry). **

In Parrish v. Cingular Wireless, 2005 WL 2420719 (Cal.App.) [Non. Pub.] [on remand] the defendant agreed to pay all costs of arbitration, all fees unrelated to litigation, offered litigation in small claims courts and did not compel forfeiture of statutory rights. Based on Discover Bank, the Parrish court found the agreement unconscionable and unenforceable.

Practice:  Aside from the fluidity of substantive and procedural law in class actions, the appellate practice is also important.  An appeal from an order granting a motion to compel arbitration is not appealable (CCP 1294) but an appeal from an order dismissing  putative class claims is subject to appeal; Konig v. U-Haul Co. of  Cal., 145 Cal.App.4th 1243 (2006) [reversed on other grounds).

Practice:  Arbitration Service Providers have drafted rules applicable to an arbitrator’s decision to resolve class action claims.  For example, AAA rules allow for a 30 day suspension of proceedings to allow judicial review of a class determination award and the arbitrator must render a “reasoned partial award.”

Note: When a party files a complaint, and the opposition files a petition to compel arbitration, pleadings are important.  In the plaintiff pled  CLRA and UCL causes of action as a representative plaintiff, i.e., seeking eventual certification.  The court noted that a ruling on the petition to compel must precede a ruling on certification of the class.  And, the UCL does not authorize arbitration of causes  of action for injunctive relief. The court also noted the complaint was subject to demurrer in grounds the parties did not share a community of interest.

12. Sanctions  [TOC]

No specific statute authorizes the arbitrator to impose sanctions, e.g., frivolous arbitration, but David v. Abergel, 46 Cal.App.4th 1281 (1996) cited the arbitration agreement that the arbitrator could impose "any relief authorized by California law." This language warranted sanctions under CCP 128.5. In Caro v. Smith, 59 Cal.App.4th (1997) the court awarded sanctions for a frivolous appeal.

13. Administrative Remedies  [TOC]

Contracts may include a condition precedent to arbitration requiring an administrative hearing, i.e., FEHA, Workers Compensation or similar proceedings. These conditions are enforceable; Valenzuela v. State of Cal., 194 Cal.App.3d 916 (1987). See, Malek v. Blue Cross of Cal., 121 Cal.App.4th 44 (2004) [reviewing administrative remedies in a health care services contract].

See, also, Ralph's Grocery Co. v. Massi, 116 Cal.App.4th 103 [depublished].

C. Substantive Law & Arbitrability  [TOC]

The term "substantive arbitrability" describes state substantive law of contracts applicable to interpretation of arbitration clauses at a hearing to compel arbitration. Federal courts in diversity cases must apply state substantive contract law in determining validity and enforcement of arbitration agreements. Individual states cannot carve out special rules for arbitration clauses inapplicable to contract law in general; Doctor's Associates, Inc. v. Casarroto, 317 U.S. 681 (1996); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 1801 (1967). As a consequence, substantive arbitrability may vary among states contingent on local contract law, and citation of extra-state contract law is not necessarily dispositive. California substantive contract law controls in the Ninth Circuit unless the Federal court concludes a statute or judicial decision adversely inhibits arbitration in general and is subject to preemption under the FAA.

1. State Statutory Claims   [TOC]

The California Supreme Court has stated, "Assuming an adequate arbitral forum, we agree with the United States Supreme Court that by agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by statute; it only submits to their resolution in an arbitral, rather than a judicial, forum;" Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000).

Despite statutory language referring to "civil action" in other contexts, the following statutory claims are arbitrable:

FEHA (wrongful termination): Govt. Code 12900; Armendariz;

Unfair Competition; Bus. & Prof. 17200 et seq.: Cruz v. Pacificare Health Systems, Inc., 30 Cal.4th 303 (2003). Cruz permitted arbitration only for remedies of disgorgement and unjust enrichment, i.e., individual rights and remedies are arbitrable. Claims for injunctive relief pursuant to B & P 17200 are not arbitrable on grounds the remedy is for the general public;

Cartright Act: Bus. & Prof. 16700; Crown Homes, Inc. v. Landes, 22 Cal.App.4th 1273 (1994);

CLRA; CC 1750: Broughton v. Cigna Health Plans, 21 Cal.4th 1066 (1999). Broughton limited arbitration to private claims but statutory provisions for public benefit are not arbitrable;

False Claims Act; CC 1265: Co. of Solano v. Lionsgate Corp., 126 Cal.App.4th 362 (2005);

False Advertising: Bus. & Prof.17500: parties cannot arbitrate an action to enjoin false advertising but claims for restitution, damages and disgorgement of profits are arbitrable; Cruz;

Franchises: Bus. & Prof. Code 20040 (agreements to binding arbitration): Cruz;

Franchise contracts: subject to arbitration; Keating v. Southland Corp., 31 Cal.3d 584 (1982) [rev'd. on other grounds]; Vlahos v. International Baking Co., Inc., 2005 WL 1632089 (Cal.App.) [Non.Cite.]. Franchise contracts are inherently adhesive, statutorily controlled and subject to allegations of "unconscionable" contracts; Discover Bank v. Sup.Ct., 36 Cal.4th 148 (2005); Independent Assn. of Mailbox Center Owners, Inc. v. Sup.Ct., 133 Cal.App.4th 396 (2005). A claim of unconscionability requires the court not only to read the face of the contract but the commercial setting, purpose and effect of the document; Bolter v. Sup.Ct., 87 Cal.App.4th 900 (2001).

In franchise disputes, plaintiffs frequently plead Corp. Code 31,000 (Franchise Investment Law); Bus. & Prof. 16,700 (Cartright Act); Bus. & Prof. Code 17,200 (unfair competition). Arbitration is authorized by Bus. & Prof. Code 20040 et seq.

Cruz and Broughton both hold that unless there is an inherent conflict between the statutory remedy and arbitration, claims are arbitrable as long as the public benefits are only incidental to private benefits sought by a Claimant.

Two major categories exist to enforcing statutory claims: a legislative enactment affecting resolution of disputes by arbitration: attorney client disputes; Aguilar v. Lerner, 32 Cal.4th 974 (2004); teachers; Bd. Of Education v. Round Valley Teachers Assn., 13 Cal.4th 269 (1996).

Although state statutory claims are subject to arbitration, employment disputes require compliance with Armendariz v. Foundation Health Psychcare Services, 24 Cal.4th 93); Spellman v. Securities Annuities & Ins. Services, Inc., 8 Cal.App.4th 452; Brookwood v. Bank of America, 45 Cal.App.4th 1667 (1996).

See, Employment Claims, this Chapter, C-4-b.

A represented employee (union member ) who does not prevail in a grievance proceeding does not lose the right to pursue statutory claims in litigation, despite a union negotiated arbitration clause, unless the CBA covers the issue and the employee has waived the right to litigation; Torrez v. Consolidated Freightways, 58 Cal.App.4th 1247 (1997); Camargo v. Ca. Portland Cement Co., 86 Cal. App.4th 995 (2001).

Cross Reference: A prior labor arbitration has no automatic collateral estoppel or res judicata effect; McDonald v. West Branch, 466 U.S. 284 (1966); Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974); Barrentine v. Arkansas-Best Freight System; 450 U.S. 728 (1981); Wright v. Universal Maritime Service Corp., 525 U.S. 70 (1998).

2. Federal Statutory Claims  [TOC]

Although federal statutory claims are subject to arbitration in state court, a party may seek revocation of an arbitration agreement if unable to vindicate federal statutory rights (underlying the claim) in an arbitrable forum; Green Tree Fin. Services Corp. v. Randolph, 531 U.S. 79 (2000).

In employment contracts, California has eliminated the distinction between enforcement of state (or) federal statutory rights and private enforcement (common law). Each is unwaivable; Little v. Auto Stiegler, Inc., 29 Cal.4th 892 (2003); Broughton v. Cigna Health Plans, 21 Cal.4th 1086 (1999) [CRLA; Civ.Code 1751].

3. Adhesive Contracts  [TOC]

Contracts of adhesion generally describe unilaterally imposed non-negotiated agreements between parties. Adhesive contracts are not automatically unenforceable. Courts must inquire whether the agreement imposes "unconscionable" terms on one party in order to determine whether or not the contract is unenforceable; Marin Storage & Trucking, Inc. v. Benco Contracting & Engineering, Inc., 89 Cal.App.4th 1042 (2001). Courts describe these terms as "substantively" unconscionable" or "procedurally " unconscionable, infra, this Chapter. In almost all cases, adhesive contracts are included in contracts of employment, consumer transactions or franchise agreements. In consumer and franchise contracts, see also Forum Selection Clauses, this Chapter.

Adhesive contracts may vary depending on the relationship between the parties. Aside from employment contracts, adhesive clauses appear in real estate sales contracts (Woodside Homes of Cal. v. Sup.Ct., 107 Cal.App.4th 723 [2003]); Medical Services Contracts [not contracts of adhesion]; CCP 1295; Bolanos v. Khalatian, 281 Cal.App.3d 1586 (1991); construction defect (Pardee v. Sup.Ct., 100 Cal.App.4th 1081 [2002]; franchises (Independent Assn. of Mailbox Center Owners, Inc. v. Sup.Ct., 133 Cal.App.4th 396 [2005]; consumer contracts (Gutierrez v. Autowest, Inc., 114 Cal.App.4th 77 [2003]; loan agreements (Patterson v. ITT Consumer Fin. Corp., 14 Cal.App.4th 1659 [1993]). In each category, the relationship between the parties may include an adhesive term(s).

One court has said adhesion per se is not a prerequisite for unconscionability; Harper v. Ultimo, 113 Cal.App.4th 1402 (2003). The California Supreme Court has not confirmed this viewpoint.

4. Unconscionable Clauses   [TOC]

a. Procedural & Substantive Contractual Arbitrability  [TOC]

Unconscionable contracts are prohibited by Civ. Code 1670.5 and expose an arbitration clause to revocation on grounds it is "unenforceable;" CCP1281.2. As noted above, courts have grafted onto this statute the concept of "procedural" and "substantive" unconscionability, i.e., both elements are required to establish a ground for revocation.

"Procedural" unconscionability addresses the negotiation process and focuses on "oppression or surprise" in the terms of the arbitration clause." The "oppression" component arises from inequality of bargaining power between the parties and the absence of negotiation, particularly by the weaker party; Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 93 (1000); McManus v. CIBC World Markets, Inc., 109 Cal.App.4th 76 (2003); Mercuro v. Sup.Ct., 96 Cal.App.4th 167 (2002); 24 Hour Fitness, Inc. v. Sup. Ct., 66 Cal.App.4th 1199 (1998).

The "surprise" prong emerges when the terms of the clause are hidden or obscured by the party seeking to enforce arbitration; Higgins v. Sup.Ct., 140 Cal.App.4th 1238 (2006); Harper v. Ultimo, 113 Cal.App.4th 1402 ((2003). Both substantive and procedural unconscionability must be present for a court to revoke an arbitration clause on these grounds, but not in the same degree. A sliding scale is invoked to measure the proportion of one to the other; Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 93 (1000).

One of the key elements of procedural unconscionability is the absence of negotiation. The burden is on the Claimant to show the absence or lack of opportunity to negotiate the arbitration clause (Abramson v. Juniper Networks, Inc., 15 Cal.App.4th 638 [2004]) or other elements of procedural arbitrability, i.e., lack of bargaining power or lack of meaningful choice; Morris v. Redwood Empire Bancorp, 128 Cal.App.4th 1305 (2005); Crippen v. Central Valley RV Outlet, Inc., 124 Cal.App.4th 1159 (2004).

"Substantive" unconscionability refers to contract terms outside the expectations of a party; Armendariz; Kinney v. United Health Care, Inc., 70 Cal.App.4th 1322 (1999). Whether an arbitration clause in a contract is "unconscionable" is often fact bound and contingent on the commercial, employment or consumer context, its negotiation and execution.

Armendariz is the leading case explaining "unconscionability" (in the context of employment), but the court may permit the parties to sever an offending clause; Martinez v. Master Protection Corp., 118 Cal.App.4th 107 (2004); CC 1670.5; McManus; Woodside Homes of Cal. v. Sup.Ct.; Bolter v. Sup.Ct., 87 Cal.App.4th 900 (2001). This exception does not apply if the terms of the arbitration language permeate the contract; Harper v. Ultimo, 113 Cal.App.4th1402 (2003); Mercuro; Pinedo v. Premium Tobacco Stores, Inc., 85 Cal.App.4th 774 (2001). The court will not undertake reformation of an unconscionable clause despite a party's offer to change the terms; O’Hare v. Municipal Resource Consultants, 107 Cal.App.4th 267 (2004).

The burden of proof to establish unconscionability is on the party opposing arbitration; Engalla v. Permanente Medical Grp., 15 Cal.4th 951 (1997). The most prominent defect in an unconscionable arbitration clause is the absence or limitation of bilateral remedies. A party seeking to enforce an arbitration clause can rebut this issue and obtain extra protection if justified by "business realities;" Armendariz; Fitz v. NCR Corp., 118 Cal.App.4th 702 (2004). A party with superior bargaining power can insert a clause for a "margin of safety" based on a legitimate business need without risking unconscionability, but those needs must be established in the contract itself and factually supported; Higgins v. Sup.Ct., 140 Cal.App.4th 1238, 1254 (2006); Stirlen v. Supercuts, Inc., 51 Cal.App.4th 1519 (1997); accord, Gatton v. T-Mobile USA, Inc., 152 Cal.App.4th 571 (2007) (distinguishing commercial contracts from consumer contracts and rejecting the availability of “market alternatives” to consumers as dispositive in resolving the unconscionability of contracts).

Cross Reference:  The Ninth Circuit has refused to enforce an arbitration clause in a consumer case in which “market alternatives” did not insulate the arbitration clause from procedural unconscionability; Shroyer v. New Cingular Wireless Services, 498 F.3d 976 (9th Cir. 2007) See, Ch. IV-G-2-a.

Note: For a case collecting cases on "unconscionability" and their subject matter, see, Nyulassy v. Lockheed Martin, 120 Cal.App.4th 1267 (2004). For a case on the doctrine in contractual terms, see Morris v. Redwood Empire Bancorp, 129 Cal.App.4th 1305 (2005).

b. Employment Contracts [TOC]

Introduction

Labor disputes are a constant source of dispute resolution. Before researching arbitration in this context,  note that workers compensation and unemployment insurance are covered by their own adjudicatory systems. Claims under the Employee Retirement Security Act (ERISA) (29 U.S.C. 1001 et seq., the  National Labor Relations Act (NLRA; (29 U.S. C. 151 et seq.), and the Occupational Health & Safety Act (OSHA; 29 U.S.C. 651 et seq.) are similarly subject to specific provisions for dispute resolution.  Suits by individual ERISA plan participants are brought against the benefit plan, not the employer (29 U.S.C. 1132).  NLRA claims brought by employees against employers are almost exclusively under the jurisdiction of the National Labor Relations Bd. OSHA claims are within the jurisdiction of the Occupational Health & Safety Administration, which has its own enforcement mechanisms; 29 U.S.C. 657 et. seq.

Research Note: Arbitration clauses in employment contracts have been subjected to considerable attack on grounds of unconscionability; Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000) [costs and fees of arbitration; unfair terms]; O'Hare v. Municipal Resource Consultants, 107 Cal.App.4th 267 (2004) [lack of signature]; (Deschene v. Pinole Point Steel Co., 76 Cal.App.4th 33 [1999]) [CBAs]; Kinney v. United HealthCare Services [unfair terms]; Martinez v. Master Protection Corp.,118 Cal.App.4th 107 (2004); CC 1670.5; Harper v. Ultimo [limiting damages]; Fitz v. NCR Corp.,118 Cal.App.4th 2004) [discovery limitations]; Abrahamson v. Juniper Networks, Inc., 115 Cal.App.4th 638 (2004) [absence of bilateral terms]; Metters v. Sup. Ct.,161 Cal.App.4th 696 (2008) [clause not incorporated by reference]; Ontiveros v. DHL Express (USA) Inc., 164 Cal.App.4th 494 (2008)[arbitrator decision to decide unconscionability unenforceable].

Federal and state courts have reached varying conclusions in interpreting employment contracts but the United States Supreme Court has specifically held that employment agreements are covered by the FAA unless workers are exempt if engaged in "transportation of goods" in interstate commerce; Circuit City Stores, Inc. v. Adams, 535 U.S. 1112 (2002). However, employment contracts may be revocable under state contract law. Cases are legion, and often fact specific.

Note: Consider other Sections of this Chapter relating to employment disputes whether statutorily based (FEHA) or common law (wrongful termination); discovery limitations; costs and fees; remedial limitations; public policy.

Cognizant of disproportionate bargaining power of employees, and the adhesive nature of employment contracts, the California Supreme Court has held that an enforceable employment agreement must include:

Employer pays all arbitration costs other than those incurred in litigation;

A neutral arbitrator;

Appropriate discovery; Fitz v. NCR Corp.,118 Cal.App.4th 2004). Discovery limitations cannot interfere with an employee’s ability  to vindicate statutory rights.  Armendariz is the seminal case on discovery, disallowing full discovery but requiring more than limited discovery often included in arbitration clauses; Ontiveros v. DHL Express (USA) Inc., 164 Cal.App.4th 494 (2008).

A reasoned award. A”written decision that will permit a limited form of judcial review;” Armendariz @ 91.

A provision for bilateral conditions or remedies.

Unless these principles apply, the contract is "unconscionable" and unenforceable unless severance is possible; Armendariz; Finetti v. Palm Spgs. Motors, 105 Cal.App.4th 708 (2003). Thus, an unenforceable damages clause, as distinct from other clauses otherwise acceptable,  would not render the clause unenforceable unless drafted in bad faith; Armendariz.

See, this Chapter, C-6,  Common Law Claims; this Chapter; E,  Remedies.

Cross Reference: That an employer must pay all non litigation costs of arbitration is not the United States Supreme Court rule, nor the rule of any Circuit Court of Appeal except the Ninth Circuit; Ferguson v. Countrywide Markets, 298 F.3d 778 (9th Cir. 2002) [adopting the California rule]. Federal courts require a case by case analysis of costs and the inability of an employee to pay.

An arbitration clause typically requires disputes "arising out of employment." An application for employment is not a dispute "arising out of employment;" Balandran v. Labor Ready, Inc., 124 Cal.App.4th 1522 (2004).

See, Part I, Chapter IV-G-5. Costs of Arbitration.

Federal courts apply state substantive state law in determining whether an arbitration clause in a contract is unconscionable; Circuit City Stores, Inc. v. Mantor, 335 F.3d 1101 (9th Cir. 2003); Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003); Ferguson. In accord with Supreme Court law, the arbitration clause cannot require conditions inapplicable to general state contract law (Hedges v. Carrigan, 117 Cal.App.4th 578 [2004]), but severance is an option for unconscionable terms under state law; Blake v. Ecker, 93 Cal.App.4th 728 (2001).

In the context of employment, the rules of severance are recited in Armendariz v. Foundation Health Psychcare Services, 24 Cal.4th 98 (2000); "Factors weighing against severance of unlawful provisions are an arbitration clause containing more than one unlawful provision; both an unlawful damages provision and an unconscionably unilateral arbitration clause. These multiple defects indicate a systemic effort to impose arbitration on an employee not simply as an alternative to litigation, but as an inferior forum that works to the employer's advantage. . . Second (paraphrasing), in cases of a lack of mutuality in the agreement, permeation of the clause (by an unlawful purpose) is evidenced by the inability of the court to strike or restrict the order to remove the unconscionable taint."

See, employment contracts violating public policy; vindicating statutory rights, union labor arbitration, class actions; this Chapter.

California has patterned its civil rights statutes to parallel Federal law prohibiting unlawful employment practices, i.e., sexual harassment, discrimination on grounds of race, gender, age and disability; Fair Employment & Housing Act (FEHA; Bus. & Prof. Code 12900). Although arbitration is extensively criticized in the employment context, this statute (and federal law) is subject to arbitration if both parties have signed a contract embodying an arbitration clause and agree to waive jury; Brookwood v. Bank of America, NTSA, 45 Cal.App.4th 1667(1996) [age discrimination]; Spellman v. Sec. Annuities & Ins. Servs, Inc., 8 Cal.App.4th 452 (1992) [race discrimination].

Armendariz and its rationale apply to unwaivable claims arising under FEHA or are tied to fundamental public policy.  “These are substantive and procedural rights, not just for the benefit of individuals but also for public purposes;” Armendariz.  The rationale of Armandariz was extended to Title VII cases in Little v. Auto-Stiegler, Inc., 29 Cal.4th 1064 (2003); Giuliano v. Inland Empire Personnel, Inc., 149 Cal.App.4th 1276 (2007).

Reference: “Stand Alone” Contracts in Employment Cases: Ch. XVI-F-4-e.

c. Unilateral Change of Terms  [TOC]

Credit card companies offer their service contingent on the right to unilaterally change the terms of the contract. Characterized as "bill stuffers," an applicant (or a current subscriber) for a credit card is informed of the right of the company to change the terms of their agreement. This practice is clearly an example of an adhesive contract and procedurally unconscionable; Aral v. Earthlink, 134 Cal.App.4th 544 (2005). Badie v. Bank of America, 67 Cal.App.4th 779 (1998); Mitchell v. Americn Fair Credit Assn, Inc., 99 Cal.App.4th 1345 (2002) [modification statutorily required]. The common practice is to unilaterally amend credit card terms to mandate arbitration, but if the customer is offered the opportunity to "opt out," the element of unconscionability disappears; Jones v. Citicorp, Inc., 135 Cal.App.4th 1491 (2006) [Rev. Grtd. and transferred to Court of Appeal to reconsider in light of Gentry].** The courts have reached mixed results; Mandel v. Household Bank (Nevada), 105 Cal.App.4th 75 (2003); Shea v. Household Bank (SB), 105 Cal.App.4th 85 (2003); 24 Hour Fitness, Inc. v. Sup.Ct., 66 Cal.App.4th 1199 (1998).

In employment contracts, the employer cannot subsequently alter the terms of an integrated contract between the parties. Interpretation of a contract requires analysis at the time the parties entered the contract; Martinez v. Master Protection Corp., 118 Cal.App.4th 1207 (2004).

d. Public Policy   [TOC]

Public policy is a judicially declared doctrine first announced in Tameny v. Atlantic Richfield Co., 27 Cal.3d 167 (1998) and similar to "External Constraints on Arbitration" outlined in Part I on Federal Courts. The California Supreme Court has identified other "public policies" that may conflict with its public policy endorsing arbitration. In addition to the doctrine of FAA preemption of state law, and despite public policy endorsing arbitration, the California Supreme Court has established a judicial exception to enforcing arbitration clauses in violation of "public policy."

"Public policy", as judicially explained,. . . "must affect society at large rather than the individual . . . must be fundamental and substantial [and] "sometimes is located in administrative regulations that serve statutory objectives;" Green v. Ralee Engineering Co., 19 Cal.4th 66 (1998); Villa Milano HOA v. Il Devorge, 84 Cal.App.4th 819 (2000). Public policy is "carefully tethered to fundamental policies delineated in constitutional or statutory provisions"; Armendariz. If the court finds that the arbitration clause violates judicially interpreted public policy, it may refuse enforcement.

Employment cases present a conflicting public policy. In Armendariz the California Supreme Court held that the doctrine of at-will employment is subject to the public policy exception prohibiting wrongful termination of an employee. An employer who terminates an employee wrongfully, acts in violation of public policy and is subject to an action under the Fair Employment & Housing Act (FEHA; Gov. Code 12900). "Public policy" is not a surrogate for judicial intervention on grounds of general policy considerations or judicial preference. Unless it is.

Accordingly, violation of judicially declared public policy is a ground to refuse enforcement of an arbitration clause; Pardee Const. Co. v. Sup.Ct., 100 Cal.App.4th 1081 (2002) [exemption from fraud]; Deschene v. Pinole Point Steel Co., 76 Cal.App.4th 33 (1999) [wrongful termination]; Phillips v. St. Mary Regional Med. Ctr., 96 Cal.App.4th 218 (2002) [same].

In the employment context, the California Supreme Court identifies unwaivable public rights, whether statutory or non statutory, which must conform to Armendariz and doctrinally confirmed in Little v. Auto Stiegler, Inc., 29 Cal.4th 1064 (2003). The court will not enforce an arbitration agreement containing unconscionable terms. In a Complaint alleging violation of private rights, claims are tested under "unconscionability" standards but severance is possible if it serves the interests of justice and does not permeate the agreement; Abrahamson v. Juniper Networks, Inc., 115 Cal.App.4th 638 (2004). In Blake v. Ecker, 93 Cal.App.4th 728 (2001), the arbitration clause specifically provided that any unenforceable term of the contract could be severed, i.e., the parties agreed to severance. This term may be sufficient to authorize arbitration of the enforceable terms.

In Little, the court extended the public policy argument to a plaintiff who alleged non-statutory employment claims of wrongful termination. Pursuant to Little and Armendariz, the employer must pay arbitration costs for allegations of wrongful termination whether the Complaint alleges statutory or common law violations. Public policy rationale of the California courts does not mirror the U.S. Supreme Court rule.

In Fitz v. NCR Corp.,118 Cal.App.4th 702 (2004), the court suggests a three step process for determining the validity of an employment agreement: 1) does the agreement implicate public or private rights 2) public rights are unwaivable, whether statutory or not, and must conform to the criteria of Armendariz in employment cases; 3) private rights are tested under "unconscionability" standards and severance of an unconscionable clause is an option.

In an arbitration clause, an employer can require mediation with an employee initially and, if unsuccessful, the parties can subsequently agree to arbitrate. A post termination agreement to arbitrate is not adhesive; Armendariz.

Note: Public policy is also reflected in the context of class actions; Discover Bank, 36 Cal.4th 148 (2005) [classwide arbitration] e.g. it is an employer's responsibility to provide a safe workplace; City of Palo Alto. v. S.E.I.U., 77 Cal.App.4th 327 (1999). Public policy is also contained in Civ. Code 1668 prohibiting contracts exempting anyone from responsibility for fraud or injury to another; Discover Bank.

Employers have asserted the right to unilaterally change the terms of an employment contract with employees but in McLemore v. Circuit City Stores, Inc., 2005 WL 1634981 (Cal.App.) [Non.Cite.] the court refused to enforce an employment agreement that did not provide informed notice of the changes to employees, citing Badie v. Bank of America; 67 Cal.App.4th 779 (1998).

See, this Chapter, C.

Note: The doctrine of unconscionability is not confined to employment cases, but potentially exists in any category, particularly home buyer, consumer and franchise agreements. For example: a contract involving television rights; Higgins v. Sup.Ct., 140 Cal.App.4th 1238 (2006).

Cross Reference: Part I, V-G; Public Policy

e. Discovery Rights  [TOC]

Limitations of discovery rights is not "substantive arbitrability" per se; Coast Plaza Doctor's Hospital v. Blue Cross of Cal., 83 Cal.App.4th 677 (2000); Elliott v. Richmond Am. Homes of Cal., Inc., 2006 WL 620792 (Cal.App.) [Non. Cite.]. But in employment arbitration the employee is entitled to limited discovery as part of the package of rights under Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000) “as determined by the arbitrator” in a FEHA claim. Both AAA and JAMS Rules track Armendariz in employment cases.

Despite statutory language restricting discovery in arbitration, the California Supreme Court in Armendariz held that Claimants were entitled to sufficient discovery to vindicate statutory rights, otherwise arbitration would deny claimant a "fair opportunity to present [a party's] position." As expected, this holding invited further litigation as to "how much" discovery was enough; Fitz v. NCR Corp., 118 Cal.App.4th 702 (2004); Mercuro v. Sup.Ct., 96 Cal.App.4th 167 (2000); International Alliance of Theatrical Stage Employees & Moving Picture Machine Operators of U.S.& Canada v. Laughton, 118 Cal.App. 4th 1380 (2005) [CBA]. But  a showing of prejudice based on information obtained in discovery causes prejudice only if the information disclosed would not have been obtained in the arbitration; St. Agnes Med. Ctr. v. Pacificare of Cal., 31 Cal.4th 1187(2003).
In Beitler & Associates, Inc. v. Way Off Broadway, 2008 WL 4228364 (Cal.App.) [Non.Pub.] the plaintiff filed a writ of attachment and defendant took depositions on that claim.  The court held that plaintiff initiated discovery by defendant to defend itself and the testimony did not constitute a waiver of its right to arbitration. 

  f. Confidentiality of Award [TOC]

No court has decided whether parties can insert a confidentiality clause prohibiting disclosure of the award in their contract. In a non published case the court held this provision violated neither public policy nor qualified as an illegal contract; Mathewson v. BDO Seidman, 2006 WL 864522 (Cal.App.) [Non. Cite].

Cross Reference: The Ninth Circuit ruled differently in Ting v. AT & T, 319 F.3d 1126 (9th Cir. 2003) but Mathewson distinguished the case. Ting involved non disclosure other than in the context of the award.

                                   

g. Confidentiality of Proceedings 

Unlike 9th Cir. law, the court in Woodside Homes of Cal., Inc. v. Sup.Ct., 107 Cal.App.4th 723 f.n 11 (2003) saw no objection to a provision in a contract containing an agreement of confidentiality of the proceedings that violated California law. Accord, Macias v. Ralph’s Grocery Co., 2008 WL 3974197 (Cal.A00.) [Non. Cite.] 

Cross Reference: Ch. IV-G-2-a-2: Confidentiality of Agreement

5. Statutorily Mandated Arbitration Clauses  [TOC]  

a. Real Estate Contracts [TOC]

1) In General

CCP 1298.7 provides that an arbitration clause in real estate transactions does not preclude filing a cause of action for “bodily injury” or “wrongful death;” Villa Milano HOA v. Il Devorge, 84 Cal.App.4th 819 (2000) [condominiums]; Pardee Construction Co. v. Sup.Ct., 100 Cal. App.4th 1081 (2002) [houses]; Flores v. Transamerica HomeFirst, 93 Cal.App.4th 846 (2001); contra, Woodside Homes of Ca., Inc. v. Sup.Ct., 107 Cal.App.4th 723 (2003); Harper v. Ultimo, 113 Cal.App.4th 1302 (2003) [homeowners]; CCP 337.1; 337.15. Emotional distress alone is not "bodily injury" and a clause excluding "bodily injury" from arbitration is inapplicable; Gravillis v. Coldwell Banker Residential Brokerage Co., 143 Cal.App.4th 761 (2006); Hedges v. Carrington, 117 Cal.App.4th 578 (2004) holds that the FAA preempts CCP 1298.7 if interstate commerce is involved.

In real estate sales, CCP 1298 is a comprehensive statute requiring written "notice" to buyer and seller that if they are contractually agreeing to arbitration in the event of a dispute between them, the agreement must be in capital letters and bolded; CCP 1298 (c ) CCP 1298 is not part of the real estate contact. The statutory language accompanies any arbitration agreement the parties elect to sign and is not part of the agreement itself; Villacreses v. Molinari, 132 Cal.App. 4th 1223 (2005).  CCP 1298 applies to  open listing real estate contracts; McAvoy v. Hilbert, 172 Cal..App.4th 707 (2009).

Whether the requirement of “bolded” words and capital letters is consistent with FAA jurisprudence is questionable, but in most residential sales the element of interstate commerce is absent; Hedges v. Carrigan, 117 Cal.App.4th 578 (2004).

Both parties to a real estate contract containing an arbitration clause must sign in order to enforce the clause; Marcus & Millicap Real Estate Investment Brokerage Co. v. Hock Investment Co., 68 Cal.App.4th 83 ( 1998).

In a subsequent case, Westra v. Marcus & Millichap Real Estate Investment & Brokerage Co., Inc., 129 Cal.App.4th 759 (2005) the court distinguished the earlier Marcus' requirement of a party signature on a real estate contract if the purchase agreement identified a third party as an "agent." This characterization bound the party to the arbitration clause despite the absence of a signature. In addition, the plaintiff had referenced the third party as an "agent" in the pleadings.

Note: Westra is an example of a non signatory to a contract compelled to arbitrate by a signatory on grounds of agency. See, Ch. XVI-F-5-f.

                                                2.) Home Improvements

Bus. & Prof. Code  7160 provides: “Any person who is induced to contract for a work of improvement, but not limited to home improvement, in reliance on a false or fraudulent representations or false statements knowingly made, may sue and recover from such contractor or solicitor a penalty of $500.00, plus reasonable attorney fees in addition to any damages sustained [from such statements or representations].” A person who waives the right to file an action by agreeing to arbitrate any controversy arising out of the contract also waives this Section.

CC 3513 precludes waiver of “public rights” but the benefits of Bus. & Prof. 7160 are damages, attorney fees and a penalty.  Bus. & Prof. Code 7160 is not enacted for a public benefit and can be waived but a plaintiff retains the right to arbitration, not litigation.; Watts v. Pacific Window Projects, Inc., 2007 WL 987872 (Cal.App.) [Non.Cite.].

3.)  Lis Pendens

CCP 1298.5 provides that a party who records a lis pendens does not waive the right to arbitrate if the recording is accompanied by an application to stay the action pending resolution of the arbitration.  But in Century 21 Chamberlain & Assocs. v. Haberman, 173 Cal.App.4th 1 (2009) the court held a party cannot file a lis pendens in an arbitration as the statute only applies if an “action” is on file.  Arbitration is not an “action;” CCP 405.20.”

4.) Conditions Precedent

Real estate contracts also provide for mediation as a condition precedent to arbitration or filing an action.  A party who brings an action without complying with this condition risks the loss of attorney fees; Van Slyke v. Gibson, 146 Cal.App.4th 1296 (2007). See, Conditions Precedent, Ch. XVII, B, 8, supra.

Note: A common problem in residential real estate transactions is the failure of one party, i.e., buyer, seller, or real estate agent, to initial the arbitration clause. The courts are not in agreement on the consequences; Marcus et al. v. Hock Investment;  Westra v. Marcus, et al.; Grubb & Ellis Co. v. Bello, 19 Cal.App.4th 231 (1993).

5.)  Arbitration Clauses

The real estate industry publishes forms for residential real estate transactions, including an arbitration provision for buyer and seller in the event of a dispute; Gravillis v. Coldwell Banker Residential Brokerage Co., 143 Cal.App.4th 761 (2006). The form may exclude the broker. In Tyquiengco v. Ca. Assn. of Realtors, 2005 WL 1655205 (Cal.App.) [Non.Cite.] the court concluded this exclusion did not violate the Unfair Competition Act; Bus. & Prof.17200.

Comment: Several cases, including Westra, above, have examined the language of an arbitration clause requiring arbitration (or mediation) to resolve real estate disputes between buyer and seller.  Cooperating brokers are also involved, but the parties may not necessarily compel their participation in arbitration. Listing brokers, non signatories to the arbitration clause, may not be compelled  to arbitrate.  In which case, the court may find potential conflicting rulings and invoke CCP 1281.c; Nguyen v. Tran, 157 Cal.App.4th  1032 (2007).

Two cases, Valencia v. Smyth, 185 Cal.App.4th 153 (2010) and Gravillis v. Coldwell Banker Residential Brokerage Co., 143Cal.App.4th 761 (2006) discuss the application of California prodedural law (CAA) in arbitration vis a vis the FAA.  In order to specifically apply the FAA arbitration rules, the parties must so indicate in the arbitration clause; Valencia.
See, Ch.

6.)  Referees [TOC]

Sales of residential real estate may include a provision for a Referee in lieu of an arbitrator to resolve disputes. Trend Homes, Inc. v. Sup.Ct., 131 Cal.App.4th 950 (2005) characterizes the practice of designating a referee to resolve a dispute as roughly comparable to conducting a trial.

The Trend court also comments on the allocation of arbitration costs to the parties and suggests the trial court can determine the financial condition of a party in imposing costs; CCP 1284.3.

Note: The parties cannot unilaterally select a Referee. CCP 638 and 640 require a "pending action" and a request by the parties to appoint a Referee.

See, Ch. XXIII, Referees.

                                                (7.) CC & Rs [TOC]

A developer routinely includes CC & Rs in the initial contract requiring a HOA to arbitrate any construction defect the latter may have against the former. CC& Rs are not an effective means of obtaining an agreement to arbitrate an HOA’s construction defect claim against the developer; Villa Vicenza HOA v. Nobel Court Development , LLC, 2010 WL 2109385 [Rehearing Gtd]. *

See, Blog, Website, www.judgewaddington-adr.com;  November 30, 2006

b. Consumer Contracts  [TOC]

1).  Arbitration Costs  [TOC]

CCP 1284.3 is a comprehensive legislative attempt to protect "consumers" from paying arbitration costs if they do not prevail in arbitration. "Costs" includes fees and expenses of the arbitration service provider, arbitrator fees, and costs necessary to confirm the award. Allocation is prohibited. The statute prohibits an arbitration service provider or arbitrator from administering any arbitration containing a clause violating this statute.

The statute does not define "consumer" but the Ethical Standards for Neutral Arbitrators, Std. 2 defines "consumers" as a “consumer party”  required to accept a pre dispute arbitration clause in the contract; Std .2 9 (d); (e)1 or a party subject to a medical malpractice claim; Std. 2 (e) 3 . CCP 1281.85 requires arbitrators to comply with ethical standards drafted by the Judicial Council. The statute lists the elements of a "consumer arbitration" and, pursuant to the Standards, the term includes an "employee;” Std. 2 (e) 4.  Matthews-Deaton v. El Torito Restaurants, Inc., 2006 WL 2349557 (Cal.App.) [Non.Cite.]

Provisions for "indigent" consumers and the right to obtain fee waivers are included in the statute. Arbitration service providers must give consumers written notice of the right to request a fee waiver; CCP 1284.3(b)(1)(2).

Gutierrez v. Autowest, Inc., 114 Cal.App.4th 77 (2003) holds a consumer agreement is unenforceable if it imposes unaffordable costs, but the court can sever the cost clause. In Gutierrez, the court also found an implied agreement not to impose unaffordable or prohibitory fees in an award if the party cannot vindicate statutory rights; See, also Jordan v. Ca. DMV, 100 Cal.App.4th 531 (2002).

The California Supreme Court has narrowed the application of the Armendariz case on the issue of arbitration costs. Pleading common law claims, as distinct from statutory claims, does not warrant allocation of costs of arbitration; CCP 1284.2. But a court may continue to review the arbitration clause on grounds of unconscionability; Boghos v. Certain Underwriters at Lloyd's of London, 36 Cal.4th 495 (2005).

2).  Consumer Remedies  [TOC]

CC 1750 et seq. (Consumer Legal Remedies Act (CLRA) is a statutory provision enacted to protect consumers from unfair or deceptive practices in the sale or lease of goods “intended to result or which results in the sale or lease of goods or services to any consumer.” CC 1770 (a) (19) proscribes insertion of an unconscionable provision in a consumer contract and, accordingly, subject to injunctive relief pursuant to the CLRA.  In Berry v. American Express Publishing, Inc., 147 Cal.App.th 224 (2007) the court held this provision inapplicable to the extension of credit-in the  form of a credit card and separate and apart from a sale or lease of goods-and refused to enjoin an allegedly unconscionable arbitration clause prohibiting class action waivers the California Supreme Court had held unenforceable in Discover Bank v. Sup.Ct., 34 Cal.4th 148 (2005).

In Broughton v. Cigna Health Plans of Cal., 12 Cal.4th 315 (1996) the court refused to enforce an arbitration clause authorizing an arbitrator to issue injunctions affeting “public rights”pursuant to the CLRA. In Cruz v. PacifiCare Health Systems, Inc., 30 Cal.4th 303 (2003) the court extended the injunctive limitations of Broughton to include Bus. & Prof. 17200 (unfair competition). Aside from this limitation, the parties can arbitrate common law or private rights  seeking damages under the statute.

Note: The Ninth Circuit has held that the FAA preempts CLRA (C.C. 1750) on grounds the statute does not apply to contracts generally; Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003). The 11th  Cir. has also refused to enforce class action waivers in the context of consumer transactions; Dale v. ComCast Corp, 498 F.3d 1216 (11th Cir. 2007 Ga.).

See, this Chapter, B-10,Costs of Arbitration.

c. Health Care Service Providers   [TOC]

1).  Arbitration Clauses   [TOC]

Arbitration Agreements

Health & Safety Code 1340 et seq. applies to health insurance coverage. Companies offering this service include a clause in the insurance contract providing for binding arbitration of any dispute arising out of the terms of coverage. Employers, acting as agent of the employees, negotiate these plans with the insurance company. Any employee who signs on to the plan is bound by its terms; Madden v. Kaiser Found. Hospitals, 17 Cal.3d 699 (1976). An action for declaratory and injunctive relief against state enforcement of these clauses was rejected in Viola v. Dept. of Managed Health Care, 133 Cal.App.4th 299 (2005). H & S 1363.1 is a statutorily approved method of resolving disputes in arbitration and the right to a jury trial is not implicated as long as employers comply with statutory mandated disclosure requirements; Viola.

In Medeiros v. Sup.Ct., 146 Cal.App.4th 1008 (2007) the court attempted to distinguish Madden by holding that an employee who had enrolled in a group health plan offered by the employer did not  agree to arbitrate in the absence of signing the arbitration clause in the enrollment form-despite the fact the employer had signed the arbitration clause in the contract  and there was no signature line in the enrollment form for the employee to sign..

Disclosure

Health & Services 1363.1(b) (d) requires health care service plans to clearly disclose, as a separate article, prominently displayed in the enrollment form and immediately before the signature line, that the enrollee submits to binding arbitration and both parties surrender the right to jury trial-including malpractice; H&S 1361(a). H & S 1373 (i) provides that if the health plan utilizes arbitration to settle disputes, the contract must set forth the types of disputes subject to arbitration, the process to be utilized and how it is to be initiated.

In Malek v. Blue Cross of Cal., 121 Cal.App.4th 44 (2004) the court held that these requirements were not adequately met and therefore the parties formed no contract; accord, Imbler v. Pacificare of Cal., 103 Cal.App.4th 567; Zembesch v. Sup.Ct., 146 Cal.App.4th 153 (2006); Ogle v. Pacificare Life & Health Ins. Co., 2007 H&S 615956 (Cal.App.) [Non.Cite.].

Robertson v. Health Net of Cal., Inc., 132 Cal.App.4th 1419 (2005) explains that "immediately before" means no intervening language between the text and signature line. Merely bolding the words "arbitration agreement" is insufficient to comply with the requirement of "prominently displayed". The whole agreement must be bolded.

Comment: Malek and Robertson are contrary to the federal rule and saved only because interstate commerce required under the FAA is not involved; Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681 (1996). Malek and Robertson are hyper technical statutory constructions but do have the advantage of creating "bright lines". By drafting health care contracts in compliance with these two cases, counsel can redraft enforceable agreements.

Note: Contracts with skilled nursing facilities may also have reference to rendition of medical services: (d) next.

See also, Beynon v. Garden Grove Medical Grp., 100 Cal.App.3d 698 (1980); Davis v. Blue Cross of No. Cal., 25 Cal.3d 418 (1979).

Selection & Appontment of  Arbitrators

Health & Safety Code 1373.20 outlines the procedure for appointing or selecting arbitrators in the absence of a plan by a health service provider to use an independent agency for this purpose.  CCP 1373.20 applies to neutral arbitrators and party arbitrators, creates a default presumption and authorizes the court to proceed in the appointment process pursuant to CCP 1281.6.
Reference: Ch. XVII; Selection & Appoint of Arbitrators

Arbitration Award

H & S section 1373.21 requires the arbitrator to render an award between a health services plan and an enrollee to be written, identifying the prevailing party, the amount of the award, and terms and reasons for the award. Although desirable, the rule may conflict with the FAA if the underlying transaction is in interstate commerce. The FAA requires no comparable provision.

Note: Distinguish Health Care providers from medical service contracts; CCP 1295. Each category contains different requirements for arbitration; Hollister v. Benzl, 71 Cal.App.4th 582 (1999). Also note the extensive statutory requirements for skilled nursing facilities do not apply to residential living facilities (Warfield v. Summerville Senior Living, Inc., 158 Cal.App.4th 443 (2007) although the court adopted the Flores court reasoning.

Practice: Evidence in health care service arbitrations is governed, in part, by the Confidentiality of Medical Information Act, CC 65.10, limiting disclosure of medical information in employment related health care service.

Blog, March 5, 2007 www.judgewaddington-adr.com

2.  Patients Bill of Rights  [TOC]

H & S 1430 creates an unwaivable right for a person to file an action for alleged violation of its provisions, (incorporating Patients Bill of Rights, Cal. Code of Regs, Title 22, Sect. 72527). Section 1599 (d) provides that if the contract contains an arbitration clause, the contract attachment pertaining to arbitration shall contain notice under Section 1430 the patient may not wiave the right to sue for violation of the Patient’s Bill of Rights.

The death of the signator survives in a wrongful death case; Fitzhugh v. Granada Healthcare and Rehabilitation Ctr., LLC, 150 Cal.App. 4th 469 (2007);  Martin v. Pacificare, 2007 WL 1229494 [Cal.App.) [Non.Cite.] cites H & S 1430 statutorily prohibiting arbitration of this statute but concludes the arbitration clause did not include heirs.  The arbitration clause in Fitzhugh also included heirs but the court concluded H & S 1430 survives for other reasons.

Fitzhugh is clearly preempted by the FAA if the case involved “commerce”  
See, Skilled Nursing Facility, this Chapter.

Blog, May 11, 2007 www.judgewaddington-adr.com

d. Medical Service Contracts  [TOC]

CCP 1295 covers claims alleging professional negligence committed during administration of medical services. The language of CCP 1295 contains a uniform standard for arbitration clauses; applies to open-book accounts for medical services; its purpose is to encourage and facilitate arbitration of medical malpractice disputes; its provisions are construed liberally; Reigelsperger v. Siller, 40 Cal.4th 574 (2007).  The parties can add additional terms to the contract to supplement the standard arbitration clause;  Reigelsperger.

CCP  1295 provides for the right of a patient to rescind the arbitration agreement within 30 days, and under most circumstances must be exercised by the patient signing the agreement.  In cases of parents and minor children the result  may be different; Rodriguez v. Sup.Ct., 176 Cal.App.4th 1461 (2009)

Practice: Counsel engaged in drafting arbitration clauses or petitioning the court to compel arbitration to resolve disputes can check CCP 1295 for the statutory requirements. The statute specifically excludes doctor-patient contracts for medical services from the category  of “adhesive” contracts if the arbitration clause tracks the language of the statute. The statute applies to “open book” accounts as defined in foonote 4 of Reigelsperger; CCP 1295 (b)

Medical malpractice claims are subject to arbitration-absent contractual allegations of fraud, coercion or lack of consent-and are neither unconscionable nor adhesive as long as the contract restates the language of the statute denying access to the court for resolution of disputes; CCP 1295; Coon v. Nicola, 17 Cal.App.4th 1225 (1993). Surrendering the right to a jury trial is emphasized by requiring a bolded arbitration clause printed in capital letters “immediately before the signature line” in 10 point type, explicitly waiving a jury; CCP 1295 (b).  Reversing the name line and the signature line, “immediately ” before the signature line as required by the statute is irrelevant; Del Prado v. THC Orange Co., 2006 WL 3555563 (Cal.App.) [Non.Cite.].

Note:  Medical service contracts are often included in skilled nursing facility contracts.H & S Code 1599.81 requires signatures for admission also and the contract may combine both clauses. The statute requires separation from other clauses and separate signatures for each clause.

Despite statutory provisions that contracts for medical services are not adhesive,  published and non-published opinions have held that an arbitration clause favoring only the doctor was substantively unconscionable; Saika v. Gold, 49 Cal.App.4th 1074 (1996); Blosser v. Sheibani, M.D., 2005 WL 906173 (Cal.App.) [Non. Cite.].

Although the statute defines the term professional "negligence," an arbitration clause containing other statutory language resolving "any dispute as to medical malpractice" includes other legal theories, i.e., battery, breach of contract, deceit; Herrera v. Sup.Ct., 153 Cal.App.3d 553 (1984); confirmed in another context in Smith v. Ben Bennett, Inc., 133 Cal.App.4th 1507 (2005); Titolo v. Cano, 157 Cal.App.4th 310 (92007) [disclosure of medical records to disability insurer].

The statute applies to open book accounts, but whether the parties entered an open book account is a mixed question of law and fact; CCP 1295 (c ). Medical malpractice is not an "economic activity" as a rule and therefore not preempted by the FAA requirement of a "commercial" transaction.

Note: Although consolidation of arbitration proceedings is authorized by CCP 1281.3, this section is inapplicable to arbitration of medical services; CCP 1281.3.

Practice: CCP 998 (offers to compromise) and CC 1291 (pre judgment interest in personal injury cases) are applicable to arbitration.  CCP by statute and CC 1291 by interpretation; Weinberg v. Safeco Ins. Co. of America, 114 Cal.App.4th 1075 (Cal.App.4th 1075 (2004).  And in enforcing an award, CCP 1295 permits the arbitrator to permit future damages in payments in lieu pf a lump sum; CCP 667. The prevailing party must notify the arbitrator of this provision prior to issuing the award; Baker v. Wu, 2009 WL 3488719 (Cal.App.Non.Cite).   

e. Skilled Nursing Facility   [TOC]

H & S 1599.61 & 1599.81 require anyone admitted to a skilled nursing care facility (CCP 1250) to receive an attachment to their contract outlining their rights regarding arbitration of disputes. H & S 1599.81 states that patients cannot waive their right to litigation of the Patient Bill of Rights and agreement to arbitrate is not a precondition for medical treatment or admission to the facility-a clause clearly preempted by the FAA; Fitzhugh v. Granada Healthcare and Rehabilitation Ctr., LLC, 150 Cal.App.4th 469 (2007).  As a practical matter, most disputes in this category will not occur in interstate commerce and ungoverned by the FAA.
H & S 1599.81  provides that an arbitration clause in a contract of admission is not a pre-condition for medical treatment or admission to the facility; the arbitration clause must be on a form separate from the admission contract; the attachment must provide a separate signature page; medical malpractice claims must be separated and a separate signature required; Derlantiss v. Heritage Convalescent Hosp., Inc., 2005 WL 1275143 (Cal.App.) [Non.Cite.].

Swayne v. Torrance Care Center West, Inc., 157 Cal.App.4th 172 (2007) [Rehrg.Gtd.] holds that the arbitration clause prohibiting consent to arbitration as a condition of admission must “clearly indicate” this assertion as required by Title 22 Cal.Code of Regs. 72516 and the arbitration clause seprate from the admission contract;  H& S1599.81 (b) .  

H & S 1599.81 applies to skilled nursing facilities (CC 1250 [c]), intermediate care facilities (CC 1250[d]) and nursing facilities (CC 1250 [k] .The statute is inapplicable  to an acute care hospital.

Comment: The principle issue in this category is the ability of a person to sign an arbitration clause when admitting a patient to a skilled nursing facility.  Because patients are often unable to sign, or not cognitive, another person signs on their behalf.
Under general contract law, one party must have authority to bind another party, either as an agent,  fiduciary, or pursuant to a power of attorney.  In skilled nursing facilities, legislation identifies those who are  authorized to make medical and admission decisions-but not legal ones.  According to Flores v. Evergreen at San Diego, LLC, 148 Cal.App.4th 581 (2007) a spouse is not within the category of those who are authorized to sign arbitration agreements to admit a patient in the context of a skilled nursing facility.

See, Ch. XVI-F-5-c, Non Signatories

Cross Reference: Ch. IV-F-2-b-c.  JP Morgan Chase & Co. v. Conegie ex rel. Lee, 492 F.3d 596 (5th Cir. 2007) reaches a different result based on state law.

For a comprehensive discussion of an arbitration agreement relating to skilled nursing facilities and relevant arbitration agreements, see Garrison v. Sup.Ct., 132 Cal.App.4th 253 (2005) [agent holding durable power of attorney can authorize arbitration for deceased parent].

See, also: Madden v. Kaiser Found. Hosps., 17 Cal.3d 699 (1976).
See, this Chapter, Probate, infra.

Note:  Whether a party can bind non parties in the context of medical services is also a question of Signatories and Non-signatories.  See, Ch. XVI, F-5-f.; Fitzhugh v. Granada Healthcare and Rehabilitation Ctr., LLC, 150 Cal.App.4th 469 (2007); Martin v. Pacificare of Cal., 2007 WL 1229494 (Cal.App.) [Non.Cite.].

f. Landlord/Tenant Contracts  [TOC]

In Jaramillo v. JH Real Estate Partners, 111 Cal.App.4th 394 (2003) the court discovered that C.C. 1942.1 and 1953 prevented arbitration clauses in "tenantability" disputes. The court also found the contract unconscionable.

Note: Most landlord-tenant disputes do not involve interstate commerce and FAA rules are unlikely to apply. Assuming preemption, this case would be preempted.

g. Land Use   [TOC]

Govt. Code 66030 provides for mediation of development projects and a mandatory settlement process in the Superior Court in the event the mediation is unsuccessful. Not arbitration, but a hybrid process of dispute resolution.

h. Residential Construction  [TOC]

In disputes over construction or improvement of property consisting of one to four units, CCP 1281.95 requires arbitrators to provide notice of personal or professional affiliations with a party. In addition, Bus. & Prof. 7191 requires a specific font size of written notice that a party to this contract is agreeing to arbitration of disputes and waiving a jury trial. If the underlying transaction is in interstate commerce, this section would be preempted; Higgins v. Carrigan, 117 Cal.App.4th 578 (2004).

In Woolls v. Sup. Ct, 127 Cal.App.4th 197 (2005) the court applied this statute against a seller who had signed a contract that did not expressly waive the right to a jury trial, rendering the contract unenforceable. If the transaction involved interstate commerce this statute applicable solely to residential construction contracts would be unenforceable  even in the presence of a choice of law provision enforcing California law; Mount Diablo Medical Ctr. v. Health Net of California, 101 Cal.App.4th 711 (2002).

Construction Defect:  Villa Milano HOA v. Il Diverge, 84 Cal.App.4th 819; Padre Const. Co., 100 Cal.App.4th 1081 (2002); Woodside Homes of Cal., Inc., 107 Cal.App.4th 723 (2003); Bears v. Mitchell, et al., 96 Cal.App.4th 96 (2002).

i. Common Interest Development  [TOC]

CC 1368.3 imparts "standing" of members to arbitrate (among other alternatives) enforcement of governing documents; damage to a common area; damage to a separate interest, or separate interest arising out of or integrally related to a common interest the association is obligated to repair. CC 1369.510 et seq. provides for the process of alternative dispute resolution in a dispute involving a homeowners association.  But an arbitration clause providing for dispute resolution among owners and developers or disputes between the association and the developer by a Referee pursuant to CCP 638 is not a written contract under the statute and is unenforceable on grounds of unconscionability;  Treo v. Kettner H.O. Assn. v. Sup. Ct., 166 Cal.App.4th 1055 (2008).

To file an "enforcement" action [declaratory, injunctive or writ relief] the parties must file a Request for Resolution. If a civil action is filed, the plaintiff must file a certificate of attempted dispute resolution; CC 1369.560; Lawrence v. Twin Palms HOA, 2006 WL 650076 (Cal.App.) [Non. Cite]; North Beverly Park HOA v. Bison, 2005 WL 1432739 (Cal.App.) [Non. Cite.]. The "notice" requirement is discussed in Regency Palms HOA v. Hughes, 2006 WL 1972237 (Cal.App.) [Non. Cite.].

Practice: If a party files a complaint without complying with CC 1369.510, the opposition can file a demurrer, which merely allows the complainant an opportunity to amend the complaint.

A complaint for damages against a builder, contractor or developer must be preceded by a meet and confer provision and a dispute resolution facilitator; CC 1375. Under the terms of the general arbitration statute (CCP 1281.2) the moving party must file evidence of a demand for arbitration and refusal by the other party as a condition of obtaining a court ordering arbitration; Mansouri v.Fleur du Lac Estates Assn., 181 Cal.App.4th 633 (2010).  

j. Construction Sub Contracts  [TOC]

CCP 410.42 renders void and unenforceable a provision in a construction contract which "require[s] any dispute between the parties to be . . . arbitrated outside this state (California). Templeton Development Corp. v. Sup. Ct., 144 Cal.App.4th 1073  (2006)  discusses this statute and enforces it.  Templeton discusses  the role of mediation and arbitration in construction contracts as conditions precedent.

See, generally, Ch. XI-F: Mediation as Condition Precedent to Arbitration

k. Disability Insurance   [TOC]

Insurance Code 10123.19. (Health Care Service Providers, this Chapter).

Disputes over coverage of disability insurance require disclosure requirements of arbitration as in H & S 1363.1: provision for appointment of an arbitrator and minimum requirements of policy compliance. Arbitration cost sharing or splitting of arbitration is not required; Boghos v. Certain Underwriters at Lloyd's of London., 36 Cal.4th 495 (2005).

l. Fire Insurance  [TOC]

Insurance Code 2071 requires a panel of appraisers if the parties cannot agree on loss. Appraisers must be "disinterested"; Daimlerchrylser Services North America LLC v. Zurich Am.Ins. Co., 2005 WL 1460587 (Cal.App.) [Non. Cite.].

m. Hazardous Substance Act  [TOC]

H & S Code 25363 & 25356.3 are comprehensive legislative definition of hazardous substances and their remediation by the responsible party. These sections authorize binding arbitration to determine apportionment of liability to a responsible party; City of Lodi v. Randtron, 118 Cal.App.4th 337 (2004).

Note: The FAA may preempt several California statutes, i.e., CCP 1298.7; Basura v. U.S. Home Corp., 98 Cal. App.4th 1205 (2002) [(construction]; Hedges v. Carrigan, 117 Cal.App.4th 578 (2004) [real estate contracts]; Woolls.

See, Ch. XIII:Preemption & Policy.

n. Uninsured Motorist  [TOC]

Ins. Code 11580.2 mandates arbitration of uninsured and underinsured motorist claims. The California Supreme Court overruled its leading case in this category, Van Tassel v. Sup.Ct., 12 Cal.3d 624 (1974), in the consolidated cases of Bouton v. USAA Casualty Ins. Co., 43 Cal.4th 1190 (2008) and O’Hanesian v. State Farm Mutual Automobile Ins. Co., 43 Cal.4th (1190 (2008).  The statute requires the parties to submit to arbitration only if the insured is entitled to recover against the uninsured motorist, and, if so, the amount of damages. “Determining whether a claimant is insured under an uninsured motorist provision is not a question of the underinsured tortfeasor’s labiality or damages owed to the insured, and … is not subject to arbitration under section 1085.2; Bouton. On a related issue, an arbitrator should decide if a default judgment obtained by the insured against the underinsured torfeasor binds the insurer; O’Hanesian.

On remand, the Court of Appeal gave the trial court additional instructions on resolving uninsured motorist claims; Bouton v. USAA Cas.Ins. Co., 167 Cal.App.4th 412.       

Uninsured motorist coverage in an insurance policy is also governed by contractual arbitration law; Mercury Ins. Grp v. Sup. Ct., 19 Cal. 4th 432 (1998) [waiver] and the insured must request arbitration within a reasonable time; Dalby v. 21st Century Ins. Co., 2007 WL 137685 (Cal.App.) [Non.Cite.].

When arbitrators award damages to the uninsured motorist , and the amount is in excess of policy limits, the insurance company must move to vacate or correct the award; Weinberg v. Safeco Ins. Co. of America, 114 Cal.App.4th 1075 (2004)

o. Automobile Repair:  [TOC]

Tanner Consumer Protection Act; CC 1793.22; 1794 (e)(2). Cummins, Inc. v. Sup.Ct., 36 Cal.4th 478 (2005) discusses this statute in detail although not in the context of arbitration. A decision rendered in a "qualified third party dispute resolution process" is binding on the manufacturer if the buyer elects to accept the decision; CCP 1793.22 (d) (2). This statute is also subject to potential preemption.

p. Mobile Home Residency  [TOC]

CC 798.25.5 prohibits a mobile home lease requiring jury waivers or binding arbitration of certain issues-but not all. For an extensive discussion of the statute regulating mobile home disputes (CC 798.77), see Adams v. MHC Colony Park Ltd,  Partnership, 2008 WL 2502527 (Non.Pub. Non Cite). If the parties are in interstate commerce, the FAA preempts.

q. Eminent Domain [TOC]

CCP 1250.420 authorizes parties to submit an eminent domain dispute to a

mediator or binding arbitration.

r. Probate  [TOC]

Probate Code 9620 provides for appointment of a temporary judge to resolve disputes between a personal representative of an estate and a third party. Section 2405 provides the same process in disputes between the estate and a conservator or guardian.

Probate Code 4688 defines the law of agency in the context of probate. A person holding a power of attorney is a fiduciary, i.e., an agent authorized to sign an arbitration agreement; Garrison v. Sup.Ct., 132 Cal.App.4th 253 (2005).  In Hogan v. Country Villa Services, 148 Cal.App.4th 259 (2007) the court construed Probate Code 4701, the health care power of attorney section. This statutory authority includes the power of an agent to execute arbitration agreements with a health care facility unless the principal restricted the power of the agent [distinguishing Goliger v. AMS Properties, 123 Cal.App.4th 374 (2004) and Pagarigan v. Libby Care Center, Inc., 99 Cal.App.4th 298 ( 2002)].

California’s probate code provides for a “no contest” clause; Probate Code 21320.  In Greenlsh v. Johnson, 2008 WL 21320 (Cal.App.) [Non.Cite.] the court held a demand for arbitration of a probate dispute is included within the meaning of the statute and qualifies as a “contest.” 

See, Weblog, Probate, March 7, 2007.
 http://judgewaddington-adr.com/news/weblog.php?id=D20070306

See,  This Ch., Skilled Nursing Facility, supra.

s. Franchises  [TOC]

Franchise contracts are inherently adhesive, i.e., not negotiable and often favoring the franchisor; Independent Assn. of Mailbox Center Owners, Inc. v. Sup.Ct., 133 Cal.App.4th 396 [2005]; Winter v. Window Fashions Professionals, Inc., 166 Cal.App.4th 943 (2008). In addition to unilaterally identifying a choice of state law for dispute resolution, the arbitration clause may include a term alerting the franchisee to the invalidity of the contract under California law restricting venue to in-state; Bus. & Prof. Code 20040.5.

According to the Winter court, the clause referencing potential invalidity of California law  constituted a lack of “meeting of the minds.”

See, this Chapter, Section C-4

Cross Reference: In Bradley v. Harris Research, Inc., 275 F.3d 884 (2001) the Ninth Circuit held the FAA preempted Bus. & Prof. Code 20040.5 but, accoring to Winter, did not consider the absence of a “mmeting of the Minds,.”nor the potentil invalidity of the choice of forum clause.  A prior  

t. Public Construction Contracts  [TOC]

Public Construction Code 10240.8 governs the dispute resolution methods for disputes of contractual disputes with state agencies. Significant differences exist between commercial arbitration and public construction arbitration; Gravillis v. Coldwell Banker Residential Brokerage Co., 143 Cal.App.4th 761 (2006) [dicta];Cal. Regs 1300 et seq. For example, the arbitrator must comply with California substantive law and submit a written award. The statute and the Regs. should be consulted before initiating a dispute resolution process against a state agency.

See, also CC 1670: Construction Contract with Public Agency.

6. Common Law Claims  [TOC]

a. Mutuality of Assent  [TOC]

If a party can establish it did not sign a contract, or did not enter into a contract, both the contract and arbitration clause are void for lack of mutual assent; Rosenthal v. Grt. Western Fin. Secs. Corp., 14 Cal.4th 394 (1996).

Mutual assent can be manifested by written or spoken words; Binder v. Aetna Life Ins. Co., 75 Cal.App.4th 832 (1999). Thus, silence on the absence of cost sharing does not invalidate an employment contract if ratified orally or by conduct in performance of the contract. The Armendariz factors (24 Cal.4th 83 (2000) are imputed in the arbitration clause to vindicate statutory rights of an employee; Little v. Auto Stiegler, 29 Cal.4th 1064 (2003); Abrahamson v. Juniper Networks, Inc., 115 Cal.App. 4th 638 (2004).

Cross Reference: A federal court agrees: Dantz v. American Apple Grp., LLC, 123 Fed.Appx. (6th Cir. 2005) [Non. Cite.]. The Restatement of Law 2d defines mutual assent as: offer by one party followed by acceptance of another party. The Ninth Circuit agrees with Binder in Circuit City Stores, Inc. v. Naja, 294 F.3d 1104 (9th Cir. 2002).

Note: Mutual assent is determined by objective criteria, not a party's subjective intent. The test is whether a reasonable person would conclude mutual assent based on the conduct of the parties; Marin Storage & Trucking, Inc. v. Benco, 89 Cal. App.4th 1042 (2001).

b. Mutuality of Remedy  [TOC]

In the employment context, Armendariz requires an arbitration clause to include mutually enforceable terms against both parties. In McManus v. CIBC World Markets Corp.,109 Cal.App.4th 76 (2003) the court distinguished this issue by citing the language of the agreement permitting severance of any unenforceable term. The court also referenced NASD rules requiring mutuality.

Armendariz requires remedial mutuality in determining whether the terms of a contract are enforceable-at least in the context of employment. Thus, limitations on punitive damages are vulnerable to revocation if statutory rights cannot be vindicated. Silence on the issuance of costs in an employment agreement is not grounds for denying a petition to compel arbitration; Little v. Auto Stiegler, 29 Cal.4th 1064 (2003); Blosser v. Sheibani, M.D., 2005 WL 906173 (Cal.App.) [Non.Cite.].

Closely allied to mutuality of remedy is mutuality of obligations other than remedial.  The language of the contract determines if the employer is bound by the same terms as the employee; Roman v. Sup.Ct., 172 Cal.App.4th 1462 (2009).

Cross Reference: Ch. IV-G-2 

Employers in trade secret disclosure agreements, and agreements prohibiting solicitation of employees and customers, frequently "carve out" the right to seek injunctive relief for themselves in the arbitration clause. Although CCP 1281.8 authorizes a party to seek provisional relief, i.e., an injunction, the authority of an arbitrator to issue a TRO is questionable; Broughton v. Cigna Health Plans of California, 12 Cal.4th 1066 (1999)[denied in the context of CRLA]; Badgley v. Van Upp, 20 Cal.App.4th 218 (1993); Chezek v. Aramark Uniform & Career Apparel, Inc., 2005 WL 3163855 (Cal.App.) [Non.Cite.].

According  to Fitz v. NCR Corp. 118 Cal.App.4th 702 (2004) trade secrets should not be exempted from mutuality of remedy because in reality it is “a desire [by the employer]to maximize its advantage based on the perceived superiority of the judicial forum and is therefore  unconscionable.”

See, this Chapter, Remedies, E.

In non-employment cases, mutuality of remedy is applicable in arbitration agreements despite a clause awarding fees and costs to the prevailing party; Guttierez v. Autowest,114 Cal.App.4th 77 (2004). Other than in employment, C.C.1717 (prevailing party) is implied as in all contractual agreements; Severtson v. Williams Const. Co., 173 Cal.App.3d 86 (1985); Blosser, above.

Requiring mediation between both parties as a condition precedent to filing an action is enforceable as a contractual clause conferring mutual remedies. Failure of a party to initiate or participate in mediation as recited in the arbitration clause prior to filing an action warrants imposition of fees and costs; Leamon v. Krajkiewcz, 107 Cal.App.4th 424 (2003).

See, Real Estate, this Chapter, C-5-a.

c. Consideration  [TOC]

Depending on state law defining consideration-usually an enforceable promise in exchange for a promise binding on both parties-the arbitration clause cannot allow one party to decide whether to perform the promised act (participate in arbitration). But a promise by an employer to be bound by the arbitration process is adequate consideration and no separate consideration is required to support an agreement to arbitrate.  Nor does the absence of mutual duties to arbitrate prevent the formation of an agreement to arbitrate-although it may provide a basis of finding an agreement to be unconscionable;  Armendariz v. Foundation Healthcare Psychcare Services, Inc., 24 Cal.4th 83 (2000).

Cross Reference: An illusory promise is unenforceable according to federal law; Floss v. Ryan's Family Steak Houses, Inc., 211 F.3d 306 (6th Cir. 2000); Lambert v. Austin Ind., 544 F.3d 1192 11 the Cir. 2008).

.

d. Fraud   [TOC]

Fraud justifies a party to rescind an arbitration clause and is a ground "as exist[s] for revocation of any contract;" CCP 1286.2. The party opposing a petition to compel arbitration must show grounds for revoking (rescinding) the arbitration clause as distinguished from the merits of the dispute; St. Agnes Med. Ctr. v. Pacificare of Cal., 31 Cal.4th 1187 (2003); Rosenthal v. Grt. Western FSC, 14 Cal.4th 394 (1996). Responsibility for rendering a judgment on this contention lies with the trial court; Engalla v. Permanente Med. Grp., Inc., 15 Cal.4th 951 (1997). The arbitrator determines the merits of the contractual fraud issues.

Rosenthal is the key case in distinguishing fraud in the inception or execution, i.e., the promisee is deceived as to the contents of the document; or does not know what he is signing; or does not know the nature of the document. (Under the FAA, this element refers to the "making of the agreement"). Mutual assent is lacking, the contract is void and rescission is unnecessary. Fraud in the inducement, i.e., promise to perform the terms of a contract, results in a voidable contract and rescission is necessary; Rosenthal. The trial court is confined to ruling on fraud allegations in the arbitration agreement, not the merits; St. Agnes.

Engalla @ 979, holds that a defrauded party does not have to show pecuniary damages in order to defeat a petition to compel arbitration.  The plaintiffs in Engalla pled the delay in selection of arbitrators in their particular case, as distinct from fraud generally, was contrary to their reasonable, fraudulently induced, contractual expectations .

In Larian v. Larian, 123 Cal.App.4th 751 (2004) the court re-stated the Rosenthal rule. Larian adds that a party objecting to a fraudulently induced arbitration clause could renew that defense at the arbitration hearing on the merits despite a trial court ruling to the contrary as to the enforcement of the clause.

Cross Reference: One variant of fraud is illiteracy of the signatory; American Heritage Life Ins. Co. v. Lang, 321 F.3d 533 (5th Cir. 2003); Beverly Enterprises-Misissippi, Inc. v. Powell, 2007 WL 2228537 (5th Cir.) [Non.Cite.]. Inability to speak the English language is not grounds for invalidating the arbitation clause absent fraud or misrepresentation by the other party; Morales v. Sun Construction, Inc., 541 F.3d 218 (3d. Cir. 2008). 

Closely allied with illiteracy is a contention that a party failed to read the terms of the contract.  Generally speaking, this defense is unavailable-unless the parties are in a fiduciary relationship; Brown v. Wells Fargo Bank, N.A., 168 Cal.App.4th 938 (2008).  The plaintiff bears the burden of proof that the entire contract, and its embedded arbitration clause, is void on grounds of a breach of fiduciary relationship; Brown.

Note: Fraud is one of the grounds for appeal; CCP 1286.2 (a) (1). A venerable case, Pico v. Cohn, 91 Cal.129 (1891) discusses the difference between intrinsic and  extrinsic fraud; Pour Le Bebe, Inc. v. Guess? Inc., 112 Cal.App.4th 810 (2003); Rushford v. Kaiser Found. Hosp., 2005 WL 880987 (Cal.App.) [Non. Cite.]. A more recent-but unpublished-case distinguishing intrinsic fraud from extrinsic fraud is Jones v.Dykstra, 2008 WL 4901080 (Cal.App.) [Non.Cite.]. Only extrinsic fraud is grounds to vacate an award.

See, Appeal-Ch. XXI-F-8-a: Grounds to Vacate Award

Cross Reference: The U.S. Supreme Court has addressed this issue in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S.440 (2006). The court confirms the distinction between fraud allegedly committed in the execution of the contract and fraud in the execution of the arbitration clause. The Court also distinguishes fraud from the absence of formation of the contract, i.e., lack of authority, absence of capacity. Unless FAA rules apply in a state arbitration, or federal preemption, Buckeye may not apply in State court; Davis v. Tsui, 2006 WL 786960 (Cal.App.) [Non.Cite.].
The Ninth Circuit has distinguished Buckeye and permits the court to consider the entire contract in determining  fraud alleged in the arbitration clause; Nagrampa v. Mailcoups, Inc., 469 F.3d 1257 (9th Cir. 2006).
See, IV-G-2-a-4).

e. Mistake: [TOC]

Distinguish the defense of "mistake" in the contract (the merits of the case) and "mistake" in the arbitration clause; Civ.Code 1689. Failure to read the contract is not legally cognizable "mistake"; Bunnett v. Regents of U.C., 35 Cal.App.4th 843 (1995); Brookwood v. Bank of America, 45 Cal.App.4th 1667 (1996); Zevada Enterprises, Inc. v. Sasson, 2005 WL 2742815 (Cal.App.) [Non.Cite.]-not an arbitration case but reviewing the law of "mistake."].

f. Good Faith & Fair Dealing  [TOC]

The covenant of good faith and fair dealing is subject to arbitration in a broad form arbitration clause; Vianna v. Doctor's Management Co., 27 Cal.App.4th 1186 (1994).An insurer (or any other party) cannot conceal from another party the presence of an arbitration clause. Failure to inform another party of an arbitration agreement waives the right of that party to seek arbitration after the latter initiates litigation; Davis v. Blue Cross of No. Cal., 25 Cal.3d 418 (1979). "The covenant of good faith and fair dealing is implied in arbitration agreements as well as other [contracts]. Conduct by one party which amounts to a deliberate effort to deprive the opposing party of ...arbitration benefits can be construed as a violation of the covenant of good faith and fair dealing;” Zamani v. St. John's Knits, Inc., 2006 WL 2261621 Cal.App. [Non.Cite.].

Note: The covenant of good faith and fair dealing is either a tort claim or a contract claim permitting damages. The action is not statutorily based; Boghos v. Certain Underwriters at Lloyd's of London, 36 Cal.4th 495 (2005).

7. Illegal or Invalid Contracts