Title: Cronus Invest. v. Concierge Serv.

State: california

Issuer: California Supreme Court

Document:

1 
Filed 3/10/05 
 
 
 
IN THE SUPREME COURT OF CALIFORNIA 
 
 
 
CRONUS INVESTMENTS, INC., 
) 
 
 
) 
 
Plaintiff, Cross-defendant 
) 
 
and Appellant; 
) 
S116288 
 
 
) 
HOWARD JON COLMAN, 
) 
 
 
) 
Ct.App. 2/4 B159591 
 
Cross-defendant  
) 
 
and Appellant, 
) 
 
 
) 
Los Angeles County 
 
v. 
) 
Super. Ct. No. LC060095 
 
 
) 
CONCIERGE SERVICES, 
) 
 
 
) 
 
Defendant, Cross-complainant ) 
 
and Respondents; 
) 
 
 
) 
WESTREC MARINA MANAGEMENT,  ) 
INC., et al.,  
) 
 
 
) 
 
Defendants and Respondents. ) 
___________________________________ ) 
 
Code of Civil Procedure section 1281.2, subdivision (c)1 permits a trial 
court, under specified circumstances, to stay arbitration pending the outcome of 
related litigation.  In Volt Information Sciences, Inc. v. Board of Trustees of 
Leland Stanford Junior Univ. (1989) 489 U.S. 468 (Volt), the United States 
                                             
 
1  
Except as otherwise noted, all further statutory references are to the Code 
of Civil Procedure. 
 
2 
Supreme Court held that the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et. seq., 
which applies to and favors the enforcement of arbitration agreements affecting 
interstate commerce, does not preempt the application of section 1281.2, 
subdivision (c) where the parties had agreed that their arbitration agreement would 
be governed by the law of California.  In this case, the parties agreed that their 
arbitration agreement would be governed by California law, but they further 
agreed that the designation of California law “shall not be deemed an election to 
preclude application of the [FAA], if it would be applicable.”  As explained 
below, we conclude that, in this situation, the FAA also does not preempt the 
application of section 1281.2, subdivision (c).   
FACTS AND PROCEDURAL HISTORY 
 
In July 2000, Howard Colman transferred a home-management business, 
Dew-All Services, Inc. (Dew-All), to a newly created company, Concierge 
Services, LLC (Concierge).  Cronus Investments, Inc. (Cronus), which is wholly 
owned by Colman, has a 20 percent interest in Concierge, while Westrec Marina 
Management, Inc. (Westrec) owns the remaining interest.  The transactions 
involved six agreements: (1) a limited liability company (LLC) agreement 
between Cronus and Westrec, which created Concierge; (2) a stock purchase 
agreement by which Concierge bought the stock in Colman’s preexisting 
company, Dew-All; (3) an employment agreement by which Concierge employed 
Colman as its president; (4) a covenant not to compete and confidentiality 
agreement between Colman and Concierge; (5) a consulting agreement between 
Cronus and Concierge; and (6) a guaranty agreement executed by Westrec of a 
promissory note payable by Concierge to Colman.   
 
3 
 
Four of the six agreements provide for the arbitration of any disputes 
between the parties “arising out of, in connection with, or in relation to the 
interpretation, performance or breach of this Agreement . . . .”2  The arbitration 
clause further specifies that: “The designation of a situs or specifically a governing 
law for this agreement or the arbitration shall not be deemed an election to 
preclude application of the [FAA], if it would be applicable.”3  The agreements 
also contained a choice-of-law clause providing that: “[t]his agreement shall be 
construed and enforced in accordance with and governed by the laws of the State 
of California, without giving effect to the conflict of laws provisions thereof.” 
 
Problems arose after the execution of the agreements, resulting in Colman’s 
discharge from his employment with Concierge.  On March 19, 2002, Cronus sued 
Concierge, Westrec, Westrec Contracting, LLC (an affiliate of Westrec), Michael 
M. Sachs (chief executive officer of Westrec), and William W. Anderson and 
Michael P. Robbins (principals in Westrec).  The complaint asserted claims for 
breach of contract, breach of fiduciary duty, conversion and fraud.  After Cronus 
                                             
 
2  
The LLC and guaranty agreements did not contain arbitration provisions.   
3  
The arbitration clause read in full as follows: 
 
“9.10.  Arbitration 
 
“(a) Agreement to Arbitrate.  Any controversy, dispute or claim arising out 
of, in connection with, or in relation to the interpretation, performance or breach 
of this Agreement, including any claim based on contract, tort or statute, shall be 
settled, at the request of either party, by arbitration conducted in Los Angeles, 
California in accordance with the then existing Rules for Commercial Arbitration 
of the American Arbitration Association (‘AAA’), and judgment upon any award 
rendered by the arbitrator may be entered by any State or Federal court having 
jurisdiction thereof.  Any controversy concerning whether a dispute is an 
arbitrable dispute shall be determined by the arbitrator.  The parties intend that this 
agreement to arbitrate be valid, specifically enforceable and irrevocable.  The 
designation of a situs or specifically a governing law for this agreement or the 
arbitration shall not be deemed an election to preclude application of the [FAA], if 
it would be applicable.” 
 
4 
filed its complaint, Colman and Cronus submitted a demand for arbitration to the 
American Arbitration Association (AAA) under the arbitration clauses in the 
underlying agreements.   
 
Concierge then filed a cross-complaint against Colman, Cronus, Nelson 
Colman (Colman’s father), and Desert Home Services, Inc. (Desert), which is 
operated by Nelson Colman.  The cross-complaint asserted claims for breach of 
contract, fiduciary fraud, unjust enrichment, and inducement of breach of contract.  
It alleged that Colman and Cronus improperly diverted business from Concierge to 
Colman’s father and Desert.   
 
Colman and Cronus then petitioned the superior court, under sections 
1281.2 and 1281.4, to stay the litigation and compel arbitration, contending that 
they had already demanded arbitration and that some of the cross-claims 
implicated agreements containing an arbitration clause.   
 
Defendants, in turn, moved to stay the arbitration pending the outcome of 
litigation and to consolidate the arbitration proceeding with the underlying action 
under section 1281.2, subdivision (c) (section 1281.2 (c)).  The trial court 
determined that: (1) some of the causes of action and controversies in the 
underlying action were not subject to arbitration; (2) only three of the eight cross-
claims were arbitrable; (3) some of the litigants were not parties to agreements 
containing an arbitration agreement; and (4) the lawsuit and arbitration 
proceedings contained overlapping issues of fact and law.  To avoid the possibility 
of contradictory outcomes and promote efficiency in the resolution of disputes, the 
court denied the petition to stay litigation and compel arbitration, granted the 
motion to stay the arbitration proceedings pending outcome of the litigation, and 
consolidated the three arbitrable cross-claims with the action “for all purposes.” 
 
The Court of Appeal affirmed the trial court’s ruling.  First, as a matter of 
contract interpretation, the Court of Appeal found that the “not. . . preclude” 
 
5 
language of the arbitration clause superseded the broader and more general choice-
of-law provision and concluded that the parties intended that the FAA apply to the 
“fullest extent” and “without limitation” in those contracts containing arbitration 
agreements.  Second, the Court of Appeal analogized a trial court’s authority to 
stay arbitration proceedings (§ 1281.2(c)) to a court’s authority to stay lawsuits 
when resolving problems of multiple litigation (§ 526, subd. (a)(6)) and found that 
section 1281.2(c) is a neutral law derived from equitable principles applicable to 
all contracts.  The court thus determined that, because section 1281.2(c) on its face  
is “an evenhanded application of state principles addressing the general problem 
of multiple litigation,” the FAA does not preempt its application. 
 
In their petition for review, plaintiff Cronus and cross-defendant Colman 
(hereafter appellants) claim that the Court of Appeal erred in concluding that the 
FAA does not preempt the application of section 1281.2(c).  Defendants (hereafter 
respondents) filed an answer to the petition, requesting that we determine whether 
the parties intended to incorporate section 1281.2(c) into the arbitration 
agreements and whether the FAA’s procedural rules apply in California courts.  
Without limiting the issues, we granted review to determine, in this case, whether 
the FAA preempts the application of section 1281.2(c).   
DISCUSSION 
 
Section 1281.2(c) requires a court to order arbitration upon petition by one 
of the parties to an arbitration agreement, “unless [the court] determines that:[¶] 
. . .[¶] (c) A party to the arbitration agreement is also a party to a pending court 
action . . . with a third party, arising out of the same transaction or series of related 
transactions and there is a possibility of conflicting rulings on a common issue of 
law or fact.”  If the court makes such a determination, it:  
 
“(1) may refuse to enforce the arbitration agreement and may order 
intervention or joinder of all parties in a single action . . . ; (2) may order 
 
6 
intervention or joinder as to all or only certain issues; (3) may order arbitration 
among the parties who have agreed to arbitration and stay the pending court action 
. . . pending the outcome of the arbitration proceeding; or (4) may stay arbitration 
pending the outcome of the court action . . . .” 
 
The parties do not dispute that this case comes within the exception to the 
general rule of arbitration enforcement specified in section 1281.2(c).  Three of the 
10 parties to the court action (Concierge, Colman, and Cronus) are parties to 
arbitrable agreements and the arbitration proceeding.  But, the other seven parties 
to the court action (Westrec, Westrec Contracting, Sachs, Anderson, Robbins, 
Nelson Colman, and Desert) are not parties to any arbitration agreement and thus 
are not amenable to arbitration.  None of the parties appear to dispute that many of 
the claims in the lawsuit are nonarbitrable.  On the other hand, the parties do 
dispute whether they intended that section 1281.2(c) procedures would govern the 
enforcement of those contracts that contain the arbitration provisions.    
 
Under United States Supreme Court jurisprudence, we examine the 
language of the contract to determine whether the parties intended to apply the 
FAA to the exclusion of California procedural law and, if any ambiguity exists, to 
determine whether section 1281.2(c) conflicts with or frustrates the objectives of 
the FAA.  We first examine the underlying purpose of and the rights created by 
the FAA and the applicable preemption principles. 
A.  The FAA’s Purpose  
 
In 1925, Congress passed the FAA to “overrule the judiciary’s longstanding 
refusal to enforce agreements to arbitrate” and to place such agreements “ ‘upon 
the same footing as other contracts, where it belongs.’[Citation.]”  (Dean Witter 
Reynolds Inc. v. Byrd (1985) 470 U.S. 213, 219-220) (Byrd)).  The federal statute 
rests on the authority of Congress to enact substantive rules under the commerce 
 
7 
clause, requiring courts to enforce arbitration agreements in contracts involving 
interstate commerce.  (Southland Corp. v. Keating (1984) 465 U.S. 1, 10-11 
(Keating).)  Here, the parties agree that the contracts at issue involve interstate 
commerce and, thus, fall within the coverage of the FAA. 
 
Section 2, the primary substantive provision of the FAA, provides:  “A 
written provision in any maritime transaction or a contract evidencing a 
transaction involving commerce to settle by arbitration a controversy thereafter 
arising . . . 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.) 
 
“Section 2 is a congressional declaration of a liberal federal policy favoring 
arbitration agreements, notwithstanding any state substantive or procedural 
policies to the contrary.  The effect of the section is to create a body of federal 
substantive law of arbitrability, applicable to any arbitration agreement within the 
coverage of the Act.”  (Moses H. Cone Memorial Hospital v. Mercury Constr. 
Corp. (1983) 460 U.S. 1, 24 (Moses H. Cone).)  Thus, the FAA “establishes that, 
as a matter of federal law, any doubts concerning the scope of arbitrable 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, supra, 460 U.S. at pp. 24-25.)  The 
policy of enforceability established by section 2 of the FAA is binding on state 
courts as well as federal courts.  (Rosenthal v. Great Western Fin. Securities Corp. 
(1996) 14 Cal.4th 394, 405 (Rosenthal).)   
 
However, the FAA’s purpose is not to provide special status for arbitration 
agreements, but only “to make arbitration agreements as enforceable as other 
contracts, but not more so.”  (Prima Paint Corp. v. Flood & Conklin Mfg. Co. 
(1967) 388 U.S. 395, 404, fn. 12.)  In accord with this purpose, the high court has 
stated that state contract rules generally govern the construction of arbitration 
 
8 
agreements.  (See, e.g., Doctor’s Associates, Inc. v. Casarotto (1996) 517 U.S. 
681, 685 (Doctor’s Associates) [“ ‘[s]tate law, whether of legislative or judicial 
origin, is applicable if that law arose to govern issues concerning the validity, 
revocability, and enforceability of contracts generally’ ”]; First Options of 
Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, 944 [state law principles governing 
formation of contracts generally apply in deciding arbitrability issue]; Allied-
Bruce Terminix Cos. v. Dobson (1995) 513 U.S. 265, 281 [“States may regulate 
contracts, including arbitration clauses, under general contract law principles . . . 
.”].)  “[T]he federal policy is simply to ensure the enforceability, according to their 
terms, of private agreements to arbitrate.”  (Volt, supra, 489 U.S. at p. 476.)  Thus, 
the FAA does not force parties to arbitrate when they have not agreed to do so (see 
Byrd, supra, 470 U.S. at pp. 219-220) or require them to do so under any specific 
set of procedural rules (Volt, supra, 489 U.S. at pp. 476, 479).  “Arbitration under 
the Act is a matter of consent, not coercion, and parties are generally free to 
structure their arbitration agreements as they see fit.  Just as they may limit by 
contract the issues which they will arbitrate [citation], so too may they specify by 
contract the rules under which that arbitration will be conducted.”  (Volt, supra, 
489 U.S. at p. 479.)   
B.  Preemption 
 
“The FAA contains no express pre-emptive provision, nor does it reflect a 
congressional intent to occupy the entire field of arbitration.  [Citation.]  But even 
when Congress has not completely displaced state regulation in an area, state law 
may nonetheless be pre-empted to the extent that it actually conflicts with federal 
law—that is, to the extent that it ‘stands as an obstacle to the accomplishment and 
execution of the full purposes and objectives of Congress.’[Citation.]”  (Volt, 
supra, 489 U.S. at p. 477.)   
 
9 
 
To ensure that arbitration agreements are enforced according to their terms, 
the FAA preempts all state laws that apply of their own force to limit those 
agreements against the parties’ will or to withdraw the power to enforce them.  
(See, e.g., Perry v. Thomas (1987) 482 U.S. 483, 490-491 [FAA preempted 
California statute that rendered private agreements to arbitrate wage collection 
claims unenforceable by requiring judicial forum for resolution of those claims]; 
Keating, supra, 465 U.S. at p. 16 & fn. 10 [FAA preempted California statute that 
rendered agreements to arbitrate certain franchise claims unenforceable by 
requiring judicial forum for resolution of those claims].)  Although state law may 
be applied to regulate contracts, including arbitration clauses, “ ‘if that law arose 
to govern issues concerning the validity, revocability, and enforceability of 
contracts generally,’[citation]” courts may not invalidate arbitration agreements 
under state law contract principles applicable only to arbitration provisions, and 
that therefore disfavor such contracts, or single them out for “suspect status.”  
(Doctor’s Associates, supra, 517 U.S. at pp. 686-687.)  For example, the high 
court found that a Montana statute that made arbitration clauses unenforceable 
unless the contract provided notice of the arbitration clause “ ‘in underlined capital 
letters on the first page of the contract’ ” directly conflicted with the FAA; the 
state law conditioned the enforceability of arbitration agreements on a notice 
requirement not applicable to contracts generally.  (Doctor’s Associates, supra, 
517 U.S. at pp. 684, 687-688.)  Only “generally applicable contract defenses, such 
as fraud, duress, or unconscionability, may be applied to invalidate arbitration 
agreements without contravening § 2” of the FAA.  (Doctor’s Associates, supra, 
517 U.S. at p. 687.) 
 
In addition, the FAA establishes a prophylactic rule governing ambiguities 
in arbitration clauses.  Section 2 of the FAA (9 U.S.C. §2), applicable to any 
arbitration agreement within the coverage of the Act, requires that “questions of 
 
10 
arbitrability . . . be addressed with a healthy regard for the federal policy favoring 
arbitration.” (Moses H. Cone, supra, 460 U.S. at p. 24.)  Any doubts or 
ambiguities as to the scope of the arbitration clause itself should be resolved in 
favor of arbitration.  (Id. at pp. 24-25; see also Volt, supra, 489 U.S. at pp. 475-
476.) 
C.  Volt 
 
Volt involved the application of section 1281.2(c) to a lawsuit with 
interrelated arbitrable and nonarbitrable claims and parties who were not subject to 
the arbitration agreement at issue.  The underlying contract, which covered the 
installation of an electrical system on the Stanford University campus, contained 
an agreement to arbitrate all disputes between the parties “ ‘arising out of or 
relating to this contract or the breach thereof.’ ”  The contract also contained a 
choice-of-law provision that the contract “ ‘shall be governed by the law of the 
place where the Project is located,’ ” which was California.  After disputes arose, 
Volt demanded arbitration.  Stanford, in turn, filed an action in the California 
superior court against Volt and other companies involved in the construction 
project with whom it did not have arbitration agreements.  The trial court, ruling 
on Stanford’s motion to stay the arbitration and Volt’s motion to compel 
arbitration and stay the lawsuit, stayed the arbitration under section 1281.2(c).  
(Volt, supra, 489 U.S. at pp. 470-471.) 
 
The California Court of Appeal affirmed the trial court’s ruling, concluding 
that the choice-of-law provision incorporated California’s rules of arbitration into 
the contract.  (Volt, supra, 489 U.S. at pp. 471-472.)  After acknowledging that 
“the interpretation of private contracts is ordinarily a question of state law, which 
this Court does not sit to review,” the high court accepted the Court of Appeal’s 
construction that the choice-of-law provision incorporated the state arbitration 
 
11 
laws, including section 1281.2(c).  (Volt, supra, 489 U.S. at pp. 474-476.)  The 
court held that application of the California statute to stay arbitration would not 
undermine the goals and policies of and is not preempted by the FAA in a case 
where the parties have agreed that their arbitration agreement will be governed by 
the law of California.  (Volt, supra, 489 U.S. at pp. 470, 477-479.)  “There is no 
federal policy favoring arbitration under a certain set of procedural rules; the 
federal policy is simply to ensure the enforceability, according to their terms, of 
private agreements to arbitrate.”  (Id. at p. 476.) 
D.  The Choice-of-law and Arbitration Clauses in This Case.  
 
In this case, the choice-of-law clause provides that: “[t]his agreement shall 
be construed and enforced in accordance with and governed by the laws of the 
State of California, without giving effect to the conflict of laws provisions 
thereof.”  The parties seem to agree that the broad choice-of-law provision 
generally incorporates California law, including the California Arbitration Act 
(CAA) (§ 1280 et. seq.), of which section 1281.2(c) is a part.  
 
Mount Diablo Medical Center v. Health Net of California, Inc. (2002) 101 
Cal.App.4th 711 (Mount Diablo)—in which the choice-of-law provision was 
similar to the one here—supports their interpretation.  There, the court stated: 
“The choice-of-law provision in the present case may be ‘generic’ in the sense that 
it does not mention arbitration or any other specific issue that might become a 
subject of controversy, but it is nonetheless broad, unqualified and all-
encompassing.  It provides that ‘the validity, construction, interpretation and 
enforcement of this Agreement’ shall be governed by California law.  The explicit 
reference to enforcement reasonably includes such matters as whether proceedings 
to enforce the agreement shall occur in court or before an arbitrator.  Chapter 2 (in 
which § 1281.2 appears) of title 9 of part III of the California Code of Civil 
 
12 
Procedure is captioned ‘Enforcement of Arbitration Agreements.’  An 
interpretation of the choice-of-law provision to exclude reference to this chapter 
would be strained at best.”  (Mount Diablo, supra, 101 Cal.App.4th at p. 722.) 
 
Thus, we agree that the choice-of-law provision—which is substantially 
similar to the provisions in Mount Diablo and Volt—incorporates California’s 
rules of arbitration into the contract.  However, the contracts at issue in Mount 
Diablo and Volt did not contain the arbitration clause here, which states: “The 
designation of a situs or specifically a governing law for this agreement or the 
arbitration shall not be deemed an election to preclude application of the [FAA], if 
it would be applicable.”  The parties agree that, as specified in the arbitration 
clause, the scope of the choice of law provision is “specifically limited by 
applicable provisions of the FAA” and is nullified “only where the FAA’s 
provisions are inconsistent with the CAA.”  Respondents contend that the 
procedural rules of section 1281.2(c) do not conflict with the FAA’s procedural 
provisions—because they do not apply in state court—or with its substantive 
provision (9 U.S.C. §2).  Appellants respond that we need not determine whether 
section 1281.2(c) conflicts with the procedural provisions of the FAA because 
application of section 1281.2(c) would, nevertheless, contravene the substantive 
goals and policies of the FAA.  Because we disagree with appellant’s premise, we 
first decide whether the procedural provisions of the FAA conflict with section 
1281.2(c). 
 
Section 3 of the FAA concerns the enforcement of arbitration agreements in 
a pending lawsuit.  It requires the “courts of the United States” to grant a party’s 
request for a stay of litigation on an arbitrable issue, pending completion of the 
 
13 
arbitration.  (9 U.S.C § 3.)4  Section 4 of the FAA concerns petitions for 
enforcement of an arbitration agreement where one party refuses to arbitrate.  It 
requires a “United States district court” to entertain an application to compel 
arbitration.  (9 U.S.C § 4.)5 
                                             
 
4  
Section 3 of the FAA states: “If any suit or proceeding be brought in any of 
the courts of the United States upon any issue referable to arbitration under an 
agreement in writing for such arbitration, the court in which such suit is pending, 
upon being satisfied that the issue involved in such suit or proceeding is referable 
to arbitration under such an agreement, shall on application of one of the parties 
stay the trial of the action until such arbitration has been had in accordance with 
the terms of the agreement, providing the applicant for the stay is not in default in 
proceeding with such arbitration.” 
5  
Section 4 of the FAA states: “A party aggrieved by the alleged failure, 
neglect, or refusal of another to arbitrate under a written agreement for arbitration 
may petition any United States district court which, save for such agreement, 
would have jurisdiction under Title 28, in a civil action or in admiralty of the 
subject matter of a suit arising out of the controversy between the parties, for an 
order directing that such arbitration proceed in the manner provided for in such 
agreement.  Five days’ notice in writing of such application shall be served upon 
the party in default.  Service thereof shall be made in the manner provided by the 
Federal Rules of Civil Procedure.  The court shall hear the parties, and upon being 
satisfied that the making of the agreement for arbitration or the failure to comply 
therewith is not in issue, the court shall make an order directing the parties to 
proceed to arbitration in accordance with the terms of the agreement.  The hearing 
and proceedings, under such agreement, shall be within the district in which the 
petition for an order directing such arbitration is filed.  If the making of the 
arbitration agreement or the failure, neglect, or refusal to perform the same be in 
issue, the court shall proceed summarily to the trial thereof.  If no jury trial be 
demanded by the party alleged to be in default, or if the matter in dispute is within 
admiralty jurisdiction, the court shall hear and determine such issue.  Where such 
an issue is raised, the party alleged to be in default may, except in cases of 
admiralty, on or before the return day of the notice of application, demand a jury 
trial of such issue, and upon such demand the court shall make an order referring 
the issue or issues to a jury in the manner provided by the Federal Rules of Civil 
Procedure, or may specially call a jury for that purpose.  If the jury find that no 
agreement in writing for arbitration was made or that there is no default in 
proceeding thereunder, the proceeding shall be dismissed.  If the jury find that an 
 
(Footnote continued on next page.) 
 
14 
 
The language used in sections 3 and 4 and the legislative history of the 
FAA suggest that the sections were intended to apply only in federal court 
proceedings.  Section 4 refers to the “United States district court” and provides 
that it can be invoked only in a court that has jurisdiction under title 28 of the 
United States Code.  (9 U.S.C. § 4.)  This language indicates that Congress 
intended to limit the application of the section to federal courts.  “In 1954, as a 
purely clerical change, Congress inserted ‘United States district court’ in § 4 as a 
substitute for ‘court of the United States.’  [Act of Sept. 3, 1954, ch. 1263, § 19, 
68 Stat. 1226, 1233.]  Both House and Senate Reports explained: ‘ “United States 
district court” was substituted for “court of the United States” because, among 
Federal courts, such a proceeding would be brought only in a district court.’  
H.R.Rep. No. 1981, 83d Cong., 2d Sess., 8 (1954); S.Rep. No. 2498, 83d Cong., 
2d Sess., 9 (1954).”  (Keating, supra,  465 U.S. at p. 29, fn. 18 (dis. opn. of 
O’Connor, J.).)   
 
Although 9 United States Code section 3 is less clear, it would appear that 
“courts of the United States” under section 3 means federal district courts, because 
state courts are courts “in” but not “of” the United States as commonly designated 
in federal law.  (Keating, supra, 465 U.S. at p. 29, fn. 18 (dis. opn. of O’Connor, 
J.).)  Because sections 3 and 4 constitute part of the same enforcement scheme 
under the FAA, the language in both sections should be interpreted consistently.  
(Keating, supra, 465 U.S. at p. 29, fn. 17 (dis. opn. of O’Connor, J.) [“§ 3 applies 
when the party resisting arbitration initiates the federal-court action; § 4 applies to 
                                                                                                                                      
 
 
(Footnote continued from previous page.) 
 
agreement for arbitration was made in writing and that there is a default in 
proceeding thereunder, the court shall make an order summarily directing the 
parties to proceed with the arbitration in accordance with the terms thereof.”   
 
15 
actions initiated by the party seeking to enforce an arbitration provision”].)  
Moreover, before the minor amendment in section 4's phrasing, “[a]s originally 
enacted, § 3 referred, in the same terms as § 4, to ‘courts [or court] of the United 
States.’ ”  (Keating, supra,  465 U.S. at p. 29 (dis. opn. of O’Connor, J.).)  The 
legislative history of the original enactment further suggests that sections 3 and 4 
were intended to regulate federal procedures for the enforcement of arbitration 
agreements.6  Thus, the identical phrasing in the FAA’s original procedural 
provisions together with its legislative history reflects a congressional intent that 
the two sections apply to federal courts.   
 
Further, the United States Supreme Court does not read the FAA’s 
procedural provisions to apply to state court proceedings.  “[W]e do not hold that 
§§ 3 and 4 of the Arbitration Act apply to proceedings in state courts.  Section 4, 
for example, provides that the Federal Rules of Civil Procedure apply in 
proceedings to compel arbitration.  The Federal Rules do not apply in such state 
court proceedings.”  (Keating, supra,  465 U.S. at p. 16, fn. 10.)  In Volt, the high 
court later confirmed that, “While we have held the FAA’s ‘substantive’ 
provisions—§§ 1 and 2—are applicable in state as well as federal court [citation], 
we have never held that §§ 3 and 4, which by their terms appear to apply only to 
                                             
 
6  
The House of Representatives’ report on the FAA noted: “ ‘This bill 
declares simply that such agreements for arbitration shall be enforced, and 
provides a procedure in the Federal courts for their enforcement.’  H.R.Rep. No. 
96, 68th Cong., 1st Sess., 1-2 (1924).”  (Byrd, supra, 470 U.S. at p. 220, fn. 6.)  
After the enactment of the FAA, the American Bar Association, which had 
participated in drafting the legislation, stated that “[t]he statute establishes a 
procedure in the Federal courts for the enforcement of arbitration agreements.[¶]  
A Federal statute providing for the enforcement of arbitration agreements does 
relate solely to procedure of the Federal courts.”  (ABA Com. on Commerce, 
Trade & Commercial Law (1925) The United States Arbitration Law and its 
Application, 11 A.B.A.J. 153, 154.)  
 
16 
proceedings in federal court [citations], are nonetheless applicable in state court.”  
(Volt, supra, 489 U.S. at p. 477, fn. 6.)  Reaffirming Volt’s distinction between the 
procedural and substantive aspects of the FAA, the court further described section 
1281.2(c) as “determin[ing] only the efficient order of proceedings [and] not 
affect[ing] the enforceability of the arbitration agreement itself.”  (Doctor’s 
Associates, supra, 517 U.S at p. 688.) 
 
Finally, our interpretation that the procedural provisions of the FAA and 
section 1281.2 do not conflict is consistent with our prior decision in Rosenthal.  
(Rosenthal, supra, 14 Cal.4th 394.)  Rosenthal dealt with the differences between 
the procedural provisions in section 4 of the FAA (9 U.S.C. § 4), designating that 
a jury decides the existence and validity of an arbitration agreement, and sections 
1281.2 and 1290.2, designating that a court decides that issue.  We determined 
that: (1) the wording of section 4 suggests it is limited to federal courts and (2) the 
state procedural rules do not frustrate or defeat section 2’s policy of enforcement 
of arbitration agreements.  (Rosenthal, supra, 14 Cal.4th at pp. 407-410.)  We 
explained that: “[T]he federal policy of ensuring enforcement of private arbitration 
agreements, centrally embodied in section 2, is not self-implementing; its 
effectuation requires that courts have available some procedure by which a party 
seeking arbitration may compel a resisting party to arbitrate.  Section 4 of the 
[FAA] establishes one such procedure; state law may or may not provide for other 
equivalent or similar procedures.”  (Rosenthal, supra, 14 Cal.4th at p. 408.)  “Like 
other federal procedural rules, therefore, ‘the procedural provisions of the [FAA] 
are not binding on state courts . . . provided applicable state procedures do not 
defeat the rights granted by Congress.’[Citation.]”  (Rosenthal, supra, 14 Cal.4th 
at p. 409.)  “Our statutes do establish procedures for determining enforceability 
not applicable to contracts generally, but they do not thereby run afoul of the 
[FAA's] section 2, which states the principle of equal enforceability, but does not 
 
17 
dictate the procedures for determining enforceability.”  (Rosenthal, supra, 14 
Cal.4th at p. 410.) 
 
Appellants rely on specific language in Volt and on the holdings of Byrd 
and Moses H. Cone.  Volt stated: “Where, as here, the parties have agreed to abide 
by state rules of arbitration, enforcing those rules according to the terms of the 
agreement is fully consistent with the goals of the FAA, even if the result is that 
arbitration is stayed where the Act would otherwise permit it to go forward.”  
(Volt, supra, 489 U.S. at p. 479, italics added.)  Appellants argue that, in the 
absence of the all-encompassing state choice-of-law provision in Volt, the Volt 
court would have found that the FAA preempts section 1281.2(c).  However, in 
Volt, the high court, for purposes of argument, simply assumed that the procedural 
rules of the FAA (9 U.S.C. §§ 3 and 4) applied in state courts.  (Volt, supra, 489 
U.S. at p. 477 [“we conclude that even if §§ 3 and 4 of the FAA are fully 
applicable in state court proceedings, they do not prevent application of [Code 
Civ. Proc.] § 1281.2(c) to stay arbitration where, as here, the parties have agreed 
to arbitrate in accordance with California law”].) 
 
Similarly, in Byrd and Moses H. Cone (federal diversity cases), the 
procedural rules of the FAA clearly applied to those federal court proceedings.  
Byrd required a federal district court to grant a party’s motion to compel 
arbitration of the pendant state arbitrable claims, pursuant to sections 3 and 4 of 
the FAA (9 U.S.C. §§ 3 and 4).  (Byrd, supra, 470 U.S. at pp. 217-218, 223-224.)  
Noting the legislative history of the FAA, the court commented that the act 
“declares simply that such agreements for arbitration shall be enforced, and 
provides a procedure in the Federal courts for their enforcement.’  H.R.Rep. No. 
96, 68th Cong., 1st Sess., 1-2 (1924).”  (Byrd, supra, 470 U.S. at p. 220, fn. 6.)  
Also relying on the procedural rules of the FAA, Moses H. Cone held that the 
federal district court erred in staying the federal court action seeking an order 
 
18 
compelling arbitration, pending resolution of a concurrent state court suit.  (Moses 
H. Cone, supra, 460 U.S. at pp. 21-26.)  Thus, Byrd and Moses H. Cone do not 
address the appropriate procedure in state courts.   
 
We must still address appellants’ claim that section 1281.2(c) conflicts with 
the spirit of the FAA because its application would undermine and frustrate 9 
United States Code section 2’s policy of enforceability of arbitration agreements.  
They argue that, under the rule of liberal construction set forth in Moses H. Cone, 
due regard must be given to the federal policy favoring arbitration, and 
ambiguities as to the scope of the arbitration clause should be resolved against the 
application of the conflicting state rule.  (Moses H. Cone, supra, 460 U.S. at pp. 
24-25 [“The Arbitration Act establishes that, as a matter of federal law, any doubts 
concerning the scope of arbitrable 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.”].)  
 
Volt  answered a similar claim.  There, the contractor argued that the 
California Court of Appeal offended the Moses H. Cone principle by interpreting 
the choice-of-law provision to mean that the parties intended the California rules 
of arbitration, including the section 1281.2(c) stay provision, to apply to their 
arbitration agreement.  In rejecting that claim, the high court responded: 
“Interpreting a choice-of-law clause to make applicable state rules governing the 
conduct of arbitration—rules which are manifestly designed to encourage resort 
to the arbitral process—simply does not offend the rule of liberal construction set 
forth in Moses H. Cone, nor does it offend any other policy embodied in the 
FAA.”  (Volt, supra, 489 U.S. at p. 476, italics added.)  The court further stated: 
“[W]e think the California arbitration rules which the parties have incorporated 
into their contract generally foster the federal policy favoring arbitration.  As 
indicated, the FAA itself contains no provision designed to deal with the special 
 
19 
practical problems that arise in multiparty contractual disputes when some or all of 
the contracts at issue include agreements to arbitrate.  California has taken the lead 
in fashioning a legislative response to this problem, by giving courts authority to 
consolidate or stay arbitration proceedings in these situations in order to minimize 
the potential for contradictory judgments.  See Calif. Civ. Proc. Code Ann. § 
1281.2(c).”  (Id. at p. 476, fn. 5.)  Because “[t]here is no federal policy favoring 
arbitration under a certain set of procedural rules” (id. at p. 476), the Court of 
Appeal’s construction of the arguably ambiguous generic choice-of-law clause—
as incorporating both the state substantive law and state pro-arbitration rules 
(rather than the FAA)—did not violate the Moses H. Cone principle.  (Ibid.)     
 
In contrast, the high court, in Mastrobuono v. Shearson Lehman Hutton, 
Inc. (1995) 514 U.S. 52  (Mastrobuono), reached a result which, at first blush, 
might appear to be inconsistent with Volt, but is not.  Applying the Moses H. Cone 
principle, it found that the generic choice-of-law clause in that case incorporated 
the state substantive law, but not state arbitration rules.  Mastrobuono involved the 
interpretation of a standard form contract between a securities brokerage firm and 
its customers, requiring arbitration.  The choice-of-law provision provided that the 
contract “ ‘shall be governed by the laws of the State of New York.’ ”  (Id. at p. 
53.)  The arbitration provision contained no express reference to claims for 
punitive damages.  New York decisional law allowed courts, but not arbitrators, to 
award punitive damages (the Garrity rule).7  A panel of arbitrators awarded 
punitive damages, but a federal district court and federal Court of Appeal 
disallowed the award.    (Mastrobuono, supra, at pp. 54-55.) 
                                             
 
7  
Garrity v. Lyle Stuart, Inc. (1976) 40 N.Y.2d 354. 
 
20 
 
The petitioners argued that the FAA preempted the Garrity rule, while the 
respondents relied on Volt, arguing that the choice-of-law provision incorporated 
state arbitration rules, including the Garrity rule.  The high court responded: “[a]t 
most, the choice-of-law clause introduces an ambiguity into an arbitration 
agreement that would otherwise allow punitive damage awards.  As we pointed 
out in Volt, when a court interprets such provisions in an agreement covered by the 
FAA, ‘due regard must be given to the federal policy favoring arbitration, and 
ambiguities as to the scope of the arbitration clause itself resolved in favor of 
arbitration.’[Citations.]”  (Mastrobuono, supra, 514 U.S at p. 62.)  “We think the 
best way to harmonize the choice-of-law provision with the arbitration provision is 
to read ‘the laws of the State of New York’ to encompass substantive principles 
that New York courts would apply, but not to include special rules limiting the 
authority of arbitrators.  Thus, the choice-of-law provision covers the rights and 
duties of the parties, while the arbitration clause covers arbitration; neither 
sentence intrudes upon the other.”  (Id. at pp. 63-64, italics added.)  
 
One commentator cogently explained the seemingly inconsistent results in 
Volt and Mastrobuono: “In Volt, the state policy furthered the federal goal of 
encouraging arbitration, and thus Moses H. Cone did not require construing 
ambiguities toward applying the FAA.  In Mastrobuono, however, the policy at 
issue would have directly impeded the FAA’s goals, thus triggering the FAA 
preemption.  As a result, it should hardly be surprising that a choice-of-law clause, 
in an agreement bound by the contract law and involving the arbitration rules of 
one state, happened to produce a different result than did a choice-of-law clause in 
an entirely different context.”  (Note, An Unnecessary Choice of Law: Volt, 
Mastrobuono, and Federal Arbitration Act Preemption (2002) 115 Harv. L. Rev. 
2250, 2259-2260, fns. omitted.)    
 
21 
 
Unlike the Garrity rule addressed in Mastrobuono, section 1281.2(c) is not 
a special rule limiting the authority of arbitrators.  It is an evenhanded law that 
allows the trial court to stay arbitration proceedings while the concurrent lawsuit 
proceeds or stay the lawsuit while arbitration proceeds to avoid conflicting rulings 
on common issues of fact and law amongst interrelated parties.  Moreover, 
“[s]ection 1281.2(c) is not a provision designed to limit the rights of parties who 
choose to arbitrate or otherwise to discourage the use of arbitration.  Rather, it is 
part of California's statutory scheme designed to enforce the parties’ arbitration 
agreements, as the FAA requires.  Section 1281.2(c) addresses the peculiar 
situation that arises when a controversy also affects claims by or against other 
parties not bound by the arbitration agreement.  The California provision giving 
the court discretion not to enforce the arbitration agreement under such 
circumstances—in order to avoid potential inconsistency in outcome as well as 
duplication of effort—does not contravene the letter or the spirit of the FAA.  That 
was the explicit holding in Volt and nothing in Mastrobuono casts doubt on that 
conclusion.”  (Mount Diablo, supra, 101 Cal.App.4th at p. 726.)  Thus, we need 
not construe any ambiguities as to the scope of the arbitration provision against the 
application of section 1281.2(c).8      
                                             
 
8  
We decline to follow Wolsey, Ltd. v. Foodmaker, Inc. (9th Cir. 1998) 144 
F.3d 1205 in which the court relied on Mastrobuono and concluded that section 
1281.2(c) governs the allocation of power between alternative tribunals and limits 
the authority of arbitrators.  Accordingly, it interpreted that the generic choice-of-
law provision did not incorporate section 1281.2(c) and precluded the federal 
district court from applying the state rule.  We also disapprove Warren-Guthrie v. 
Health Net (2000) 84 Cal.App.4th 804 and Energy Group, Inc. v. Liddington 
(1987) 192 Cal.App.3d 1520 to the extent their holdings are predicated on the 
conclusion that section 1281.2(c) limits the authority of arbitrators and conflicts 
with the FAA.  
 
22 
 
Our opinion does not preclude parties to an arbitration agreement to 
expressly designate that any arbitration proceeding should move forward under the 
FAA’s procedural provisions rather than under state procedural law.  We simply 
hold that the language of the arbitration clause in this case, calling for the 
application of the FAA “if it would be applicable,” should not be read to preclude 
the application of 1281.2(c), because it does not conflict with the applicable 
provisions of the FAA and does not undermine or frustrate the FAA’s substantive 
policy favoring arbitration. 
CONCLUSION 
 
For the reasons stated above, we affirm the judgment of the Court of 
Appeal.  
 
CHIN, J. 
 
WE CONCUR: 
 
GEORGE, C.J. 
KENNARD, J. 
BAXTER, J. 
WERDEGAR, J. 
BROWN, J. 
MORENO, J. 
 
 
 
 
See next page for addresses and telephone numbers for counsel who argued in Supreme Court. 
 
Name of Opinion Cronus Investments v. Concierge Services 
__________________________________________________________________________________ 
 
Unpublished Opinion 
Original Appeal 
Original Proceeding 
Review Granted XXX 107 Cal.App.4th 1308 
Rehearing Granted 
 
__________________________________________________________________________________ 
 
Opinion No. S116288 
Date Filed: March 10, 2005 
__________________________________________________________________________________ 
 
Court: Superior 
County: Los Angeles 
Judge: Richard B. Wolfe 
 
__________________________________________________________________________________ 
 
Attorneys for Appellant: 
 
William A. Soroky; Rehwald Rameson Lewis & Glasner, William Rehwald, Lawrence M. Glasner and 
Daniel R. Chaleff for Plaintiff, Cross-defendant and Appellant and for Cross-defendant and Appellant. 
 
Greines, Martin, Stein & Richland, Robert A. Olson and Cynthia E. Tobisman for Health Net of California 
as Amicus Curiae on behalf of Plaintiff, Cross-defendant and Appellant and Cross-defendant and 
Appellant. 
 
 
__________________________________________________________________________________ 
 
Attorneys for Respondent: 
 
Thomas J. Ready for Defendant, Cross-complainant and Respondent and for Defendants and Respondents. 
 
 
 
 
 
 
 
 
 
 
 
Counsel who argued in Supreme Court (not intended for publication with opinion): 
 
William A. Soroky 
5855 Topanga Canyon Blvd., Suite 400 
Woodland Hills, CA  91367 
(818) 710-8498 
 
Robert A. Olson 
Greines, Martin, Stein & Richland 
5700 Wilshire Boulevard, Suite 375 
Los Angeles, CA  90036 
(310) 859-7811 
 
Thomas J. Ready 
16633 Ventura Boulevard, Sixth Floor 
Encino, CA  91436 
(818) 907-0400