Opinion ID: 1160537
Heading Depth: 2
Heading Rank: 1

Heading: Trial Court Procedure for Deciding a Petition to Compel Arbitration

Text: The parties correctly agree that because the transactions here involved interstate commerce, questions concerning arbitrability of the parties' dispute are governed by the USAA. (See 9 U.S.C. §§ 1, 2.) The primary substantive provision of the USAA is section 2, which provides: 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 ... 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.) (1) 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 [USAA]. ( Moses H. Cone Hospital v. Mercury Const. Corp. (1983) 460 U.S. 1, 24 [74 L.Ed.2d 765, 785, 103 S.Ct. 927] ( Moses H. Cone ).) The rule of enforceability established by section 2 of the USAA preempts any contrary state law and is binding on state courts as well as federal. ( Southland Corp. v. Keating (1984) 465 U.S. 1, 10-16 [79 L.Ed.2d 1, 11-16, 104 S.Ct. 852] ( Southland Corp. ).) The policy of enforceability stated in section 2 of the USAA is implemented in the remaining sections of the USAA, especially sections 3 and 4, which concern attempts to resist arbitration or to litigate an issue subject to arbitration. Section 3 requires any court 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.) Section 4 requires a United States district court to entertain an application to compel arbitration. (9 U.S.C. § 4.) Five days' notice of the application is required, to be served on the party in default in the manner provided by the Federal Rules of Civil Procedure. ( Ibid. ) The court is to order arbitration if satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue. If such an issue is presented, the court is to proceed summarily to the trial thereof. ( Ibid. ) Despite the summary nature of the proceeding, the party resisting arbitration may demand a jury trial on issues of the existence of the arbitration agreement or the party's default thereunder. Upon this demand, the court is to refer the matter to a jury in the manner provided by the Federal Rules of Civil Procedure, or may specially call a jury for that purpose. ( Ibid. ) [3] In most important respects, the California statutory scheme on enforcement of private arbitration agreements is similar to the USAA; the similarity is not surprising, as the two share origins in the earlier statutes of New York and New Jersey. (See Recommendation and Study Relating to Arbitration (Dec. 1960) 3 Cal. Law Revision Com. Rep. (1961) p. G-28 (Law Revision Commission Study); Feldman, Arbitration Law in California: Private Tribunals for Private Government (1957) 30 So.Cal.L.Rev. 375, 388, fn. 45.) Code of Civil Procedure section 1281, like section 2 of the USAA, provides that predispute arbitration agreements are valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract. Code of Civil Procedure section 1281.2 (hereafter section 1281.2), like the USAA's section 4, provides a procedure by which a party may petition the court to order arbitration of a controversy. Under section 1281.2, as under section 4 of the USAA, the court may deny the application if it finds the party resisting arbitration did not in fact agree to arbitrate. [4] Like section 3 of the USAA, Code of Civil Procedure section 1281.3 provides that when a court has ordered arbitration of a controversy, any pending litigation on the same controversy is to be stayed. [5] (2a) In one important respect, however, section 1281.2 differs from section 4 of the USAA: The California statute does not provide for a jury trial of issues as to the making of the arbitration agreement or the resisting party's default thereunder. Instead, our statutory scheme requires petitions to compel arbitration to be determined in the manner ... provided by law for the making and hearing of motions. (Code Civ. Proc., § 1290.2 (hereafter section 1290.2).) The question thus arises whether section 4 of the USAA, or sections 1281.2 and 1290.2, provide the procedure to be followed in a California court in a case where the USAA governs arbitrability of the controversy. As noted, the Courts of Appeal have reached differing results on this question. (Compare Strauch v. Eyring, supra, 30 Cal. App.4th at p. 186 [jury trial provision of the USAA's section 4 does not apply in state court proceedings] with Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 67 Cal. App.3d at pp. 24-25 [noting the USAA provides for a `trial,' by jury if requested, and that [t]he proceedings below ... were controlled by the [USAA]], Rice v. Dean Witter Reynolds, Inc. (1991) 235 Cal. App.3d 1016, 1025, fn. 4 [1 Cal. Rptr.2d 265] [State court litigant is entitled to a jury trial on the issue of fraud. (9 U.S.C. § 4.)], and Strotz v. Dean Witter Reynolds, Inc. (1990) 223 Cal. App.3d 208, 210, fn. 1 [272 Cal. Rptr. 680] [Under the USAA, as applicable in state court, the parties are entitled to a jury trial of the issue whether a valid agreement to arbitrate exists.].) In light both of the specific language of the USAA and of general principles of federal preemption, we conclude the USAA does not require California courts to hold a jury trial on the existence of an arbitration agreement. [6] The Court of Appeal decisions just cited are disapproved to the extent they reach the opposite conclusion. Section 4 of the USAA does not explicitly govern the procedures to be used in state courts. As already noted, the statute contemplates a petition in United States district court, and provides that certain steps are to be taken in the manner provided by the Federal Rules of Civil Procedure. This language has led the United States Supreme Court to express its doubt that section 4 is applicable in state courts. Thus, in Southland Corp., supra, 465 U.S. 1, 16, footnote 10 [79 L.Ed.2d 15], the court explained: In holding that the Arbitration Act preempts a state law that withdraws the power to enforce arbitration agreements, we 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. In Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 477 [103 L.Ed.2d 488, 498-499, 109 S.Ct. 1248], the high court again declined to decide the issue, which it stated had been expressly reserv[ed] in Southland Corp. The court remarked that sections 3 and 4 by their terms appear to apply only to proceedings in federal court. ( Volt Info. Sciences v. Leland Stanford Jr. U., supra, 489 U.S. at p. 477, fn. 6 [103 L.Ed.2d at p. 499].) Although the wording of section 4 of the USAA thus suggests it is limited to federal courts, that language is not completely dispositive, in that section 2 of the USAA, by contrast, has no such restricted range. Under the holding in Southland Corp., section 2's rule of enforceability of arbitration clauses preempts contrary state law even in a state court proceeding. But the 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 USAA establishes one such procedure; state law may or may not provide for other equivalent or similar procedures. If no adequate state procedures are provided, state courts may, in order fairly to adjudicate a federal claim for enforcement of an arbitration agreement, be obliged to adopt a procedure similar in its essentials to that set out in the USAA. As the high court has previously explained (albeit with reference to section 3 of the USAA, rather than section 4), [t]his is necessary to carry out Congress' intent to mandate enforcement of all covered arbitration agreements; Congress can hardly have meant that an agreement to arbitrate can be enforced against a party who attempts to litigate an arbitrable dispute in federal court, but not against one who sues on the same dispute in state court. ( Moses H. Cone, supra, 460 U.S. at p. 26, fn. 34 [74 L.Ed.2d at p. 786].) That section 2 of the USAA does preempt contrary state law is established; it follows that a state procedural statute or rule that frustrated the effectuation of section 2's central policy would, where the federal law applied, be preempted by the USAA. The question whether a jury trial is called for thus requires us to go beyond the language of section 4 of the USAA and apply broader principles of federal preemption. (3) It is a general and unassailable proposition ... that States may establish the rules of procedure governing litigation in their own courts, even when the controversy is governed by substantive federal law. ( Felder v. Casey (1988) 487 U.S. 131, 138 [101 L.Ed.2d 123, 137, 108 S.Ct. 2302].) By the same token, however, where state courts entertain a federally created cause of action, the `federal right cannot be defeated by the forms of local practice.' ( Ibid. ) Thus, as we have previously recognized, a state procedural rule must give way if it impedes the uniform application of the federal statute essential to effectuate its purpose, even though the procedure would apply to similar actions arising under state law. ( McCarroll v. L.A. County etc. Carpenters (1957) 49 Cal.2d 45, 61, 62 [315 P.2d 322].) At a minimum the state procedure must be neutral as between state and federal law claims. ( Howlett v. Rose (1990) 496 U.S. 356, 372 [110 L.Ed.2d 332, 350-351, 110 S.Ct. 2430].) More exactingly, the state rule may be preempted if it would stand `as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.' ( Felder v. Casey, supra, 487 U.S. at p. 138 [101 L.Ed.2d at p. 138].) Uniform national application of a federal substantive law requires, in particular, that state courts not apply procedural rules that would frequently and predictably produce different outcomes ... based solely on whether the [federal] claim is asserted in state or federal court. ( Ibid. ) (2b) Like other federal procedural rules, therefore, the procedural provisions of the [USAA] are not binding on state courts ... provided applicable state procedures do not defeat the rights granted by Congress.  ( McClellan v. Barrath Constr. Co., Inc., supra, 725 S.W.2d at p. 658, italics added.) We think it plain the California procedures for a summary determination of the petition to compel arbitration serve to further, rather than defeat, the enforceability policy of the USAA. Sections 1281.2 and 1290.2 are neutral as between state and federal law claims for enforcement of arbitration agreements. They display no hostility to arbitration as an alternative to litigation; to the contrary, the summary procedure provided, in which the existence and validity of the arbitration agreement is decided by the court in the manner of a motion, is designed to further the use of private arbitration as a means of resolving disputes more quickly and less expensively than through litigation. [7] Finally, having a court, instead of a jury, decide whether an arbitration agreement exists will not frequently and predictably produce different outcomes. ( Felder v. Casey, supra, 487 U.S. at p. 138 [101 L.Ed.2d at p. 138].) Because the California procedure for deciding motions to compel serves to further, rather than defeat, full and uniform effectuation of the federal law's objectives, the California law, rather than section 4 of the USAA, is to be followed in California courts. In a distinct, but related, argument, plaintiffs maintain the use of a motion procedure to decide the petition to compel arbitration violates the USAA because it constitutes a special rule for arbitration agreements, not applicable to contracts generally. As the United States Supreme Court has explained on several occasions, section 2 of the USAA, where applicable, precludes states from singling out arbitration provisions for suspect status, requiring instead that such provisions be placed `upon the same footing as other contracts.' ( Doctor's Associates, Inc. v. Casarotto (1996) 517 U.S. ___, ___ [134 L.Ed.2d 902, 909, 116 S.Ct. 1652, 1656].) Thus, a substantive state law rule may be applied to agreements subject to the USAA only if the state law arose to govern issues concerning the validity, revocability and enforceability of contracts generally. ( Perry v. Thomas (1987) 482 U.S. 483, 492, fn. 9 [96 L.Ed.2d 426, 437, 107 S.Ct. 2520]; see also Southland Corp., supra, 465 U.S. at p. 16, fn. 11 [79 L.Ed.2d at pp. 15-16].) Contrary to plaintiffs' claim, however, nothing in the California procedures violates this principle. Sections 1281.2 and 1290.2 establish no special rule of nonenforceability applicable only to arbitration agreements. Nor do the California procedures place arbitration agreements at a disadvantage compared to other contracts, or single them out for suspect status. Our statutes do establish procedures for determining enforceability not applicable to contracts generally, but they do not thereby run afoul of the USAA's section 2, which states the principle of equal enforceability, but does not dictate the procedures for determining enforceability. Moreover, section 2, as part of a statutory scheme establishing special procedures for deciding enforceability of arbitration agreements, could not reasonably be interpreted as forbidding the use of such procedures.
(4) Plaintiffs contend that if, as we hold above, section 4 of the USAA does not apply in California courts, then the California statutes (sections 1281.2 and 1290.2) must be construed to mandate the trial court make only a preliminary determination of sufficiency of evidence to void the arbitration agreement, with a jury trial of the issue to follow if the evidence of fraud is deemed sufficient. Plaintiffs maintain that allowing the court finally to decide whether the arbitration agreement is void for fraud would deprive them of their state constitutional rights to due process and a jury trial. (Cal. Const., art. I, §§ 7, 16.) We find no violation of state constitutional rights in the summary procedure for decision, without a jury, of whether a valid arbitration agreement exists. A petition to compel arbitration `is in essence a suit in equity to compel specific performance of a contract.' ( Spear v. California State Auto. Assn. (1992) 2 Cal.4th 1035, 1040 [9 Cal. Rptr.2d 381, 831 P.2d 821]; Freeman v. State Farm Mut. Auto. Ins. Co. (1975) 14 Cal.3d 473, 479 [121 Cal. Rptr. 477, 535 P.2d 341]; Trubowitch v. Riverbank Canning Co. (1947) 30 Cal.2d 335, 347 [182 P.2d 182].) Because actions for specific performance were not recognized at common law, the California Constitution does not guarantee the parties to such a proceeding a jury trial. ( Hastings v. Matlock (1985) 171 Cal. App.3d 826, 835 [217 Cal. Rptr. 856].) Moreover, [t]he fact that in an action for specific performance of an agreement the court must determine the existence of the agreement does not itself transform the action into one at law. ( Ibid. ; Walton v. Walton (1995) 31 Cal. App.4th 277, 288 [36 Cal. Rptr.2d 901].) Under these principles, plaintiffs are not constitutionally entitled to a jury trial on whether the arbitration agreements should be specifically enforced, including the question whether they are void for fraud. The petition for an order of arbitration here was not a new, independent action; rather, it was filed in response to a complaint seeking, among other forms of relief, money damages, and was coupled with a request that litigation of the complaint be stayed pending completion of the arbitration. Plaintiffs therefore compare this case to those in which a plaintiff's release of liability is raised as a defense in an action for damages from personal injury. In such cases courts have held the issue of fraud in the inception or inducement of the release is for the jury in the underlying action. ( Palmquist v. Mercer (1954) 43 Cal.2d 92, 100 [272 P.2d 26]; Frusetta v. Hauben (1990) 217 Cal. App.3d 551, 558-560 [266 Cal. Rptr. 62].) Neither of the cited decisions, however, considered any constitutional issue; the question was simply whether, under the particular facts of the case, the trial court properly removed an issue of fraud from the jury by an order for nonsuit ( Palmquist ) or summary judgment ( Frusetta ). Neither stands for the proposition the Legislature is constitutionally barred from establishing a nonjury procedure for deciding whether to order specific enforcement of a particular type of contractual agreement. Plaintiffs also compare sections 1281.2 and 1290.2 to various statutes creating barriers to pleading specific causes of action or claims for damages. (E.g., Code Civ. Proc., §§ 425.13 [punitive damages against health care provider], 425.14 [punitive damages against religious corporation], 425.16 [SLAPP (strategic lawsuits against public participation) suits], Civ. Code, § 1714.10 [action for civil conspiracy against attorney for conspiring with client to contest or compromise dispute].) This court and the Courts of Appeal, noting the potential deprivation of jury trial that might result were these statutes construed to require the plaintiff first to prove the specified claim to the trial court, have instead read the statutes as requiring the court to determine only if the plaintiff has stated and substantiated a legally sufficient claim. (See, e.g., College Hospital, Inc. v. Superior Court (1994) 8 Cal.4th 704, 719 [34 Cal. Rptr.2d 898, 882 P.2d 894] [Code Civ. Proc., § 425.13]; Lafayette Morehouse, Inc. v. Chronicle Publishing Co. (1995) 37 Cal. App.4th 855, 866-867 [44 Cal. Rptr.2d 46] [Code Civ. Proc., § 425.16]; Hung v. Wang (1992) 8 Cal. App.4th 908, 926-934 [11 Cal. Rptr.2d 113] [Civ. Code, § 1714.10].) Plaintiffs' reliance on these decisions is misplaced. Under the cited statutes, the trial court is charged with making a preliminary determination as to the merit of the plaintiff's proposed cause of action or claim for punitive damages. In deciding an application to compel, in contrast, the superior court does not decide whether the plaintiff's causes of action have merit, although some factual questions considered in deciding the application may overlap those raised by the plaintiff's claims for relief. The only question implicated by the petition to compel arbitration is whether the arbitration agreements should be specifically enforced. As we have already seen, plaintiffs are not constitutionally entitled to a jury trial on that question. The plaintiff is not impermissibly denied a jury trial when the superior court decides only the facts necessary to determine specific enforceability of an arbitration agreement, an equitable question as to which no jury trial right exists. In support of their claim the summary procedure of sections 1281.2 and 1290.2 deprives them of due process, plaintiffs asset the hearing and determination of a petition to compel could take place early on in the proceedings, without the opportunity for discovery. Plaintiffs do not, however, assert they actually had insufficient time to conduct discovery before hearing of the petition, or that they sought and were refused discovery of any matter pertinent to the enforceability of the arbitration clause. Plaintiffs, of course, have full access to, and have made full use of, their own recollections of the transactions, the principal evidence upon which their claim of fraud in inception of the arbitration agreement is based. GWFSC has provided pertinent written evidence (the client agreements and other account forms), as well as declarations of its representatives, in support of its petition. These circumstances do not establish plaintiffs have been unfairly denied discovery of anything they need to oppose the petition to compel arbitration. We therefore conclude the summary procedure established by sections 1281.2 and 1290.2 does not violate the cited provisions of the California Constitution. A party opposing contractual arbitration of a dispute does not have the right to a jury trial of the existence or validity of the arbitration agreement. (5) Instead, when a petition to compel arbitration is filed and accompanied by prima facie evidence of a written agreement to arbitrate the controversy, the court itself must determine whether the agreement exists and, if any defense to its enforcement is raised, whether it is enforceable. Because the existence of the agreement is a statutory prerequisite to granting the petition, the petitioner bears the burden of proving its existence by a preponderance of the evidence. If the party opposing the petition raises a defense to enforcement  either fraud in the execution voiding the agreement, or a statutory defense of waiver or revocation (see § 1281.2, subds. (a), (b))  that party bears the burden of producing evidence of, and proving by a preponderance of the evidence, any fact necessary to the defense. ( Strauch v. Eyring, supra, 30 Cal. App.4th at p. 186.) Defendants urge us to hold a party opposing arbitration must show fraud not only by a preponderance of evidence, but by clear and convincing evidence. We are not persuaded such a rule does or should exist. Except as the law otherwise provides, the burden of proof is by a preponderance of the evidence. (Evid. Code, § 115.) Section 1281.2, which sets forth the bases for granting or denying an application to compel, neither states nor suggests any other burden of proof. We have, moreover, previously rejected the suggestion that allegations of fraud, in a civil action, must be proven by clear and convincing evidence. ( Liodas v. Sahadi (1977) 19 Cal.3d 278, 286-291 [137 Cal. Rptr. 635, 562 P.2d 316].) Defendants' invocation of the general policy favoring enforcement of valid arbitration agreements is insufficient to warrant imposing a higher burden on a party opposing arbitration, especially when the existence and enforceability of the agreement to arbitrate is the very issue before the trial court.
We consider next the means to be used by the trial court in finding the facts relevant to enforcement of the arbitration agreement. As both parties acknowledge, hearing and determination in the manner ... provided by law for the ... hearing of motions (§ 1290.2) would ordinarily mean the facts are to be proven by affidavit or declaration and documentary evidence, with oral testimony taken only in the court's discretion. (Code Civ. Proc., § 2009; Cal. Rules of Court, rules 303(a)(2), 323(a); Strauch v. Eyring, supra, 30 Cal. App.4th at p. 184; Reifler v. Superior Court (1974) 39 Cal. App.3d 479, 483-484 [114 Cal. Rptr. 356]; Haldane v. Haldane (1962) 210 Cal. App.2d 587, 593 [26 Cal. Rptr. 670].) GWFSC nevertheless maintains that when the declarations and documentary evidence present a material factual dispute as to the existence or enforceability of the arbitration agreement, the trial court must proceed to a summary bench trial of the issues. In cases of this sort, GWFSC insists, the failure to resolve a material issue of fact by an evidentiary hearing is an abuse of discretion. We decline to embrace the broad rule proposed by GWFSC. There is simply no authority for the proposition that a trial court necessarily abuses its discretion, in a motion proceeding, by resolving evidentiary conflicts without hearing live testimony. Nonetheless, we agree that where  as is common with allegations of fraud such as are made here  the enforceability of an arbitration clause may depend upon which of two sharply conflicting factual accounts is to be believed, the better course would normally be for the trial court to hear oral testimony and allow the parties the opportunity for cross-examination. As the trial court here remarked, it's pretty difficult to weigh credibility without seeing the witnesses.
The declarations presented by plaintiffs and GWFSC were in extensive and material conflict. The trial court, lacking adequate appellate guidance on the issue, was unsure whether its role was to resolve these factual issues or merely to determine whether the evidence presented by the plaintiff has sufficient substantiality. As discussed above, the former course was the correct one under sections 1281.2 and 1290.2. The trial court, however, appears to have chosen the latter, denying the petition, as to all but one plaintiff, on the ground plaintiffs presented sufficient evidentiary support for their allegations of fraud. To the extent, therefore, any plaintiff did produce legally sufficient evidence of fraud voiding the arbitration agreement, the trial court must determine the factual issues on remand. We turn next to the question whether any of the plaintiffs did produce such evidence.