Opinion ID: 2509558
Heading Depth: 2
Heading Rank: 4

Heading: The Choice-of-law and Arbitration Clauses in This Case.

Text: In this case, the choice-of-law clause provides: This 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, 124 Cal.Rptr.2d 607 ( 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 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, 124 Cal.Rptr.2d 607.) 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 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] 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, 104 S.Ct. 852 (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, 104 S.Ct. 852 (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, 104 S.Ct. 852 (dis. opn. of O'Connor, J.) [§ 3 applies when the party resisting arbitration initiates the federal-court action; § 4 applies to 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, 104 S.Ct. 852 (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, 104 S.Ct. 852.) 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 proceedings in federal court [citations], are nonetheless applicable in state court. ( Volt, supra, 489 U.S. at p. 477, fn. 6, 109 S.Ct. 1248.) 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, 116 S.Ct. 1652.) 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, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) 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, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) 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, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) 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, 58 Cal.Rptr.2d 875, 926 P.2d 1061, italics added.) 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 dictate the procedures for determining enforceability. ( Rosenthal, supra, 14 Cal.4th at p. 410, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) 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, 109 S.Ct. 1248 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, 109 S.Ct. 1248 [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, 4). ( Byrd, supra, 470 U.S. at pp. 217-218, 223-224, 105 S.Ct. 1238.) 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, 105 S.Ct. 1238.) 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 compelling arbitration, pending resolution of a concurrent state court suit. ( Moses H. Cone, supra, 460 U.S. at pp. 21-26, 103 S.Ct. 927.) 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, 103 S.Ct. 927 [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, 109 S.Ct. 1248 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 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, 109 S.Ct. 1248.) Because [t]here is no federal policy favoring arbitration under a certain set of procedural rules ( id. at p. 476, 109 S.Ct. 1248), 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, 115 S.Ct. 1212, 131 L.Ed.2d 76 ( 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, 115 S.Ct. 1212.) 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, 115 S.Ct. 1212.) 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: At 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, 115 S.Ct. 1212.) 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, 115 S.Ct. 1212 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.) 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, 124 Cal. Rptr.2d 607.) Thus, we need not construe any ambiguities as to the scope of the arbitration provision against the application of section 1281.2(c). [8] 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.