Source: https://caselaw.findlaw.com/ca-court-of-appeal/1135906.html
Timestamp: 2019-04-20 01:18:58+00:00

Document:
CABLE CONNECTION, INC., et al., Plaintiffs and Appellants, v. DIRECTV, INC., Defendant and Respondent.
Beatie and Osborn and Daniel A. Osborn for Plaintiffs and Appellants. Reed & Smith and Andrew E. Paris; Kirkland & Ellis, Michael E. Baumann, Los Angeles, and Becca Wahlquist for Defendant and Respondent.
Plaintiffs and appellants Cable Connection, Inc., TV Options, Inc., Swartzel Electric, and Orbital Satellite, Inc., appeal from the trial court's order in favor of defendant and respondent DIRECTV, Inc., vacating an arbitration award by which the majority of arbitrators determined that the parties' arbitration agreement, though silent on the issue, nonetheless permitted classwide arbitration. (Code Civ. Proc., § 1286.2.) The trial court vacated the arbitration award on the grounds that the arbitrators exceeded their authority by writing terms into the parties' agreement; the arbitrators refused to hear material evidence of intent offered by DIRECTV; and the arbitrators exceeded their powers by making errors of law and erroneously relying on California procedural law, even though the arbitration agreement specifically withheld from the arbitrators the power to make errors of law, and provided that errors of law were subject to judicial review.
We conclude that the provision in the arbitration agreement purporting to provide for judicial review of errors of law is void and unenforceable, and must be severed from the agreement. Accordingly, the trial court exceeded its authority when it reviewed the merits of the controversy. We further conclude that the arbitrators did not violate any express provisions of the parties' agreement, and did not refuse to hear material evidence. We shall therefore reverse the order vacating the arbitration award, and shall direct the trial court to enter a new order confirming the award.
Appellants initially brought suit in Oklahoma state court, seeking to litigate claims on behalf of a nationwide class. The Oklahoma court apparently directed the dealers to file a demand for arbitration in California state court.
On March 11, 2004, the dealers filed a statement of claim and demand for class arbitration with the American Arbitration Association (AAA). The class is defined as DIRECTV dealers who sold, installed, repaired, or maintained home satellite service for DIRECTV from 1996 until the present. The dealers claimed that DIRECTV unilaterally reduced commissions and assessed “chargebacks,” in breach of the parties' agreements. The dealers state claims for breach of contract, unfair business practices, breach of fiduciary duty, violation of California antitrust law, and conversion of commission payments.
DIRECTV served its answer and counterclaim on April 12, 2004.
A preliminary conference was held in November 2004, and thereafter the parties submitted briefing on the issue of class arbitration. Oral argument was held in January 2005.
The third arbitrator dissented, finding that “[t]here is ample indication in the parties' Agreement that they intended their disputes to be resolved by arbitration between them separately and individually, and not in a class-wide arbitration.” The dissenting arbitrator further opined that the jurisprudence established in the Keating and Blue Cross cases permitting classwide arbitration was inapplicable “as a procedural rule” in a case that is to be governed by the Federal Arbitration Act.
DIRECTV then filed in the trial court a petition to vacate the award. The parties submitted briefs, and oral argument was held in June 2005. After the California Supreme Court issued its decision in Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100, the trial court sought additional briefing from the parties and held another oral argument.
The bases upon which DIRECTV sought vacatur were that (1) by writing terms into the parties' silent agreements, the arbitrators exceeded their authority; (2) the arbitrators refused to hear material evidence of intent offered by DIRECTV; and (3) because the arbitration agreement specifically withheld from the arbitrators the power to make errors of law, the arbitrators exceeded their contractually-limited authority by making errors of law and legal reasoning.
On November 11, 2005, the trial court vacated the award, finding that the arbitrators exceeded their powers by rewriting the parties' agreements to allow for classwide arbitration, by applying Keating, supra, 31 Cal.3d 584, 183 Cal.Rptr. 360, 645 P.2d 1192 and Blue Cross, supra, 67 Cal.App.4th 42, 78 Cal.Rptr.2d 779 (finding them to be inapplicable because they establish procedural and not substantive law), and committed reversible error by failing to admit extrinsic evidence offered by DIRECTV.
The dealers contend that the trial court erred in vacating the arbitrators' award because the arbitrators did not exceed their powers, and indeed, the trial court exceeded its jurisdiction by examining whether the arbitrators made errors of law. They argue that, despite the presence of language in the arbitration agreement purporting to allow for judicial review of errors of law by the arbitrators, such review is not permissible. As we shall explain, we agree.
The parties' contract contained standard language regarding arbitration, that “[a]ny dispute or claim arising out of the interpretation, performance, or breach of this Agreement ․, shall be resolved only by binding arbitration, at the request of either party.” (Italics added.) As is typically the case in arbitration agreements, the parties thus indicated their intent that the arbitration award would be final.
DIRECTV points out, however, that Moncharsh also recognized that arbitration agreements are contracts, and that parties to such contracts may vary the terms of their agreement. The Moncharsh court stated: “In cases involving private arbitration, ‘[t]he scope of arbitration is ․ a matter of agreement between the parties' [citation], and ‘ “[t]he powers of an arbitrator are limited and circumscribed by the agreement or stipulation of submission.” ’ [Citations.]” (Moncharsh, supra, 3 Cal.4th at pp. 8-9, 10 Cal.Rptr.2d 183, 832 P.2d 899.) DIRECTV contends that the trial court was not bound to follow Moncharsh's limitations on judicial review in light of the parties' specific arbitration contract which required the arbitrators to follow the rule of law, and provided for judicial review of errors of law.
In addition, of course, the arbitration agreement at issue here provided that “the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error [of law or legal reasoning].” Suffice it to say, however, that we are in accord with the appellate courts that have previously considered the effect of similar language and concluded that parties cannot contractually expand the jurisdiction of the trial courts to permit review of arbitration awards for legal error.
The Crowell court further noted, as did the court in Moncharsh, that the Legislature specifically provided in section 1296, governing public construction contract arbitration agreements, that the parties may agree to judicial review of an arbitrator's award.8 (Crowell, supra, at pp. 737-738, 115 Cal.Rptr.2d 810; Moncharsh, supra, 3 Cal.4th at pp. 25-26, 10 Cal.Rptr.2d 183, 832 P.2d 899.) Section 1296 also specifies that, if the parties' agreement so provides, a court shall vacate the award if upon review the court finds the award to be unsupported by substantial evidence, or to be based on an error of law.
DIRECTV further contends that because the parties specified that the Federal Arbitration Act (FAA) would govern the arbitration proceedings, we are constrained to enforce the arbitration agreement according to its terms, including the provision that allows for judicial review of legal error. DIRECTV cites the case of Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 479, 109 S.Ct. 1248, 103 L.Ed.2d 488 (Volt ), as authority for the proposition that “the ‘primary purpose’ of the FAA is to ‘ensur[e] that private agreements to arbitrate are enforced according to their terms' in order to ‘give effect to the contractual rights and expectations of the parties.’ ” However, numerous federal circuit courts have considered the precise issue whether private parties may contract for an expanded standard of judicial review of arbitral decisions under the FAA. The circuits are currently split on whether to extend the ruling in Volt to permit enforcement of such provisions.
Insofar as we need pronounce on the issue, we agree with the reasoning of the Ninth Circuit in Kyocera, supra, 341 F.3d 987. Nothing in the FAA purports to give private parties the power to expand by contract the statutorily conferred jurisdiction of courts to vacate arbitration awards. Just as the FAA does not compel federal courts to enforce attempts to contractually expand their limited power to review arbitral decisions, it also does not compel California courts to enforce attempts to contractually expand their power to review arbitral decisions conferred by the California Arbitration Act. Thus, we decide that we are not required by the FAA to enforce the arbitration agreement according to its terms, including the provision that allows for judicial review of legal error.
By contrast here, the arbitrators did not violate any similarly express provision in the sales agency agreement. DIRECTV contends that certain language in the agreement indicates that the parties contemplated only separate and individual arbitrations rather than classwide arbitration. That is vastly different from saying that the agreement expressly prohibits classwide arbitration. There simply is no provision in the parties' agreement that prohibits classwide arbitration. The cases cited above upon which DIRECTV relies are entirely distinguishable.
DIRECTV further contends that the arbitrators exceeded their powers by relying on Keating v. Superior Court, supra, 31 Cal.3d 584, 183 Cal.Rptr. 360, 645 P.2d 1192 (approving of classwide arbitration) and Blue Cross, supra, 67 Cal.App.4th 42, 78 Cal.Rptr.2d 779 (permitting arbitrators to order classwide arbitration in a case governed by Federal Arbitration Act where the parties' agreement is silent) because those cases establish only procedural law, and the arbitration agreement at issue directs the arbitrators to apply federal procedural law and California substantive law. We disagree with DIRECTV's characterization of Keating and Blue Cross as establishing only procedural law when they held classwide arbitration to be permissible.
Taken together, Keating and Blue Cross established that, under appropriate circumstances, parties to adhesion contracts enjoy the right to pursue redress of grievances by way of classwide arbitration. Their conclusions were based in large part on the fact that arbitration is highly favored, as well as the perception that gross unfairness would result in some cases from the denial of the opportunity to proceed on a classwide basis. (See Blue Cross, supra, at pp. 53-55, 78 Cal.Rptr.2d 779.) In this context, the right to pursue classwide arbitration cannot be said to constitute a mere procedural vehicle. Rather, it is more accurately described as constituting a substantive right.
We conclude that the trial court erred in ruling that the arbitrators exceeded their powers by relying on principles established in Keating and Blue Cross, as the holdings of these cases do indeed constitute substantive law, which the arbitrators were directed to follow. As such, even if the arbitration award were properly reviewable by the trial court and by this court for legal error, the trial court's ruling that the majority arbitrators erred in their application of California substantive law would require reversal. The law established in Blue Cross and Keating gives arbitrators discretion to order classwide arbitration even where the arbitration agreement is silent on that issue, in divergence from the general rules of contract interpretation that terms are not to be inserted into contracts.
DIRECTV submitted to the arbitrators the declarations of several DIRECTV-compatible equipment retailers and of the person who drafted the sales agency agreement on behalf of DIRECTV, in an effort to support its argument that the parties did not intend to permit classwide arbitration when they entered into the arbitration agreement in the sales agency agreement. DIRECTV contends that the trial court properly vacated the arbitration award on the basis that the arbitrators failed to “consider relevant extrinsic evidence,” i.e., the retailers' and drafter's declarations. Pursuant to section 1286.2, subdivision (a)(5), a trial court shall vacate an arbitration award if the court determines that “The rights of the party were substantially prejudiced ․ by the refusal of the arbitrators to hear evidence material to the controversy.” The trial court based its vacation of the award, in part, on this ground. We conclude that the trial court erred in so doing.
The record on appeal makes clear that the arbitrators did not “refus [e] ․ to hear evidence material to the controversy.” (§ 1286.2, subd. (a)(5), italics added.) Vacation of the award on this basis was not warranted.
In any event, the declarations at issue were not relevant. They merely offered the subjective opinions of a few dealers and the drafter of the arbitration agreement for DIRECTV regarding their undisclosed understanding and intention that the arbitration provision would not permit classwide arbitration, without relating any objective facts surrounding the negotiations over the provision that would demonstrate that the matter was considered or discussed.
The parties did not initially address in their briefs on appeal what the effect should be were we to conclude, as we have, that the trial court exceeded its authority by examining the legal merits of the arbitrators' award. We therefore requested supplemental briefing from the parties to address the following issue: If this court determines to be invalid and unenforceable the provision in the parties' arbitration agreement that “the award may be vacated or corrected on appeal to a court of competent jurisdiction for any [errors of law or legal reasoning],” can that provision be severed from the arbitration agreement?
The alternatives would be to sever the invalid provision, to find the entire arbitration agreement to be void, or to remand the matter for the purpose of holding an evidentiary hearing on the issue. Having considered the applicable law and the supplemental briefing, in which DIRECTV argues against severability and the dealers argue in favor thereof, we conclude that the invalid provision can and should be severed from the arbitration agreement.
In Crowell, supra, 95 Cal.App.4th at page 740, 115 Cal.Rptr.2d 810, the appellate court concluded that “[t]he provision for judicial review of the merits of the arbitration award was so central to the arbitration agreement that it could not be severed. To do so would be to create an entirely new agreement to which neither party agreed.” Accordingly, the Crowell court concluded that the plaintiff could not amend his complaint for declaratory relief to sever the unenforceable provisions of the arbitration agreement, with the effect that the entire arbitration agreement was determined to be null and void.
The court in CC Partners, supra, 101 Cal.App.4th 635, 124 Cal.Rptr.2d 363, also found invalid a provision in an arbitration agreement that attempted to permit judicial review of legal errors, but diverged from the Crowell court with regard to the severability of the invalid provision. The court's analysis is instructive, and we therefore quote from it at some length: “We agree with the primary holding in Crowell. We do not have the power to review de novo any questions of law decided by the arbitrator. That does not mean, however, that we necessarily follow Crowell and find the parties' arbitration agreement void and unenforceable.
“The unmistakable intent of this language is that all provisions of the License Agreement, including the arbitration agreement, are to be enforced except to the extent they are invalid. CC Partners, however, suggests that we remand this matter to the trial court for an evidentiary hearing on severability. We decline to do so.
“First, we see no ambiguity in the language of the severance clause. It plainly provides that the remainder of the parties' agreement will not be affected by any invalid provisions. Though California law permits the use of extrinsic evidence to explain the meaning of a written instrument (Pacific Gas & E. Co. v. G.W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 37 [69 Cal.Rptr. 561, 442 P.2d 641]), CC Partners fails to point to any ambiguity in the severance clause and it does not suggest how the language could have a different meaning. It has made no offer of proof as to what evidence it would introduce to reveal an ambiguity or suggest a different meaning.
Accordingly, we sever the provision from the arbitration agreement that “the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error.” The remainder of the agreement shall remain extant.
The order vacating the arbitration award is reversed, and the trial court is directed to enter a new order confirming the award. Appellants are to recover their costs on appeal.
We concur: MANELLA and SUZUKAWA, JJ.
1. For purposes of this discussion, we refer to the sales agency agreement as the applicable contract.
2. The majority also noted that the award was “issued pursuant to” American Arbitration Association Rule 3 of the Supplementary Rules for Class arbitration, and Green Tree Financial Corp. v. Bazzle (2003) 539 U.S. 444, 123 S.Ct. 2402, 156 L.Ed.2d 414.
5. All undesignated section references are to the Code of Civil Procedure.
6. DIRECTV also argues that the arbitrators exceeded their powers by relying on the AAA supplementary rules for class arbitrations in rendering their decision, when those rules indicate that in construing the applicable arbitration clause, the arbitrators are not to consider the supplementary rules to be a factor in favor of or against permitting classwide arbitration. Whether the arbitrators did in fact consider the supplementary rules in favor of permitting classwide arbitration, such an inquiry into purported legal error on the part of the arbitrators is not subject to judicial review.
9. DIRECTV notes that the AAA Supplementary Rules for Class Arbitrations “provide for review by a court of competent jurisdiction at several stages during the process of determining whether a contract permits class arbitration procedures, whether a class can and should be certified, and whether a certified class is entitled to judgment in its favor.” DIRECTV contends that “[t]he AAA appears to be basing its process on the assumption that such review would ensure that class-related decisions are made properly by arbitrators. But an application of Crowell here would eliminate such appellate review, and would thus disallow the applicable AAA procedures.” We disagree with the initial premise that the AAA rules for class arbitration contemplate judicial review that is different in kind or scope from the review ordinarily applicable to arbitral decisions. We express no intention or purpose to disallow these AAA rules.
10. Specifically, the agreement stated: “ ‘The decision of the arbitrator shall be final and binding upon the parties without appeal or review except as permitted by California law, ․ provided, however, that either party may file an application to correct or vacate the arbitration award or an application for de novo review on all questions of law based on the arbitrator's finding of fact (which are deemed for such purpose to be stipulated by the parties), in either case under California Code of Civil Procedure Section 1285 et seq.’ ” (Italics added.) (CC Partners, supra, 101 Cal.App.4th at p. 645, fn. 3, 124 Cal.Rptr.2d 363.)Likewise, in Crowell the arbitration agreement stated that “ ‘upon the petition of any party to the arbitration, a court shall have the authority to review the transcript of the arbitration proceedings and the arbitrator's award and shall have the authority to vacate the arbitrator's award, in whole or in part, on the basis that the award is not supported by substantial evidence or is based upon an error of law.’ ” (Crowell, supra, at pp. 732-733, 115 Cal.Rptr.2d 810.)DIRECTV attempts to draw a distinction between the language in the agreements in Crowell and CC Partners and that in the arbitration agreement before us on the basis that the arbitration provisions in the former cases “did not contain language defining the powers of arbitrators to restrict them from committing errors of law or legal reasoning.” We conclude that this is a distinction without a difference because the contract language in both Crowell and CC Partners implicitly but definitively presupposes that the arbitrators would be expected to follow rules of law, given that in each case the arbitration award was subject to de novo review on all questions of law.
12. See Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 130 Cal.Rptr.2d 892, 63 P.3d 979; Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 171 Cal.Rptr. 604, 623 P.2d 165; and Linder v. Thrifty Oil Co. (2000) 23 Cal.4th 429, 97 Cal.Rptr.2d 179, 2 P.3d 27.
13. This characterization of the request is confirmed by counsel's response to the arbitrator's statement, which was to seek clarification of the panel's authority to compel attendance of witnesses.
15. DIRECTV contends that severance of only the expanded judicial review provision would not be legally viable, as that provision “is only a portion of a larger idea and purpose of the arbitration agreement, which is to limit the powers of the arbitrators to make errors of law or legal reasoning and to preserve a mechanism to enforce this limit.” It continues: “The parties would, on the surface, retain their agreed-upon arbitration free from legal errors, but would lose any means to enforce the limitation they placed on the arbitrators.” We conclude, however, that the remaining language is not rendered meaningless in the absence of a mechanism for its enforcement. The provision requiring the arbitrators to follow the law differentiates the arbitrators' instructions from those arbitration agreements in which the parties contemplate that the arbitrators will do justice but not be bound by the strict confines of the law.

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