Opinion ID: 2533812
Heading Depth: 1
Heading Rank: 2

Heading: the california standards and sro appointed arbitrators

Text: Do the California Standards that the Judicial Council adopted in 2002 apply to neutral arbitrators appointed for contractual arbitration by an SRO or other third-party arbitration service or provider? To the extent the California Standards purport to apply to arbitrators appointed by SRO's and other third-party arbitration providers, are they invalid as exceeding the scope of the statutory authorization? Section 1281.85(a) mandates that a person serving as a neutral arbitrator pursuant to an arbitration agreement shall comply with the California Standards. Code of Civil Procedure section 1280, subdivision (d) (hereafter section 1280(d)) defines a neutral arbitrator as one who is either (1) selected jointly by the parties or by the arbitrators selected by the parties or (2) appointed by the court when the parties or the arbitrators selected by the parties fail to select an arbitrator who was to be selected jointly by them. As mentioned earlier, the Legislature enacted section 1281.85(a) in 2001; it adopted section 1280(d)'s definition of arbitrator, however, much earlier, in 1961 (Stats.1961, ch. 461, § 2, p. 1540), and it has not amended this definition since. The California Standards define neutral arbitrator somewhat differently than section 1280(d) does: `Arbitrator' and `neutral arbitrator' mean any arbitrator who is subject to these standards and who is to serve impartially, whether selected or appointed: [¶] (A) Jointly by the parties or by the arbitrators selected by the parties; [¶] (B) By the court, when the parties or the arbitrators selected by the parties fail to select an arbitrator who was to be selected jointly by them; or [¶] (C) By a dispute resolution provider organization, under an agreement of the parties. (California Standards, std. 2(a)(1), italics added.) [4] The standards define [d]ispute resolution provider organization as any nongovernmental entity that, or individual who, coordinates, administers, or provides the services of two or more dispute resolution neutrals. ( Id., std. 2(g).) The California Constitution grants the Judicial Council authority to, among other things, adopt rules for court administration, practice and procedure, and perform other functions prescribed by statute. (Cal. Const., art. VI, § 6, subd. (d).) The Constitution adds: The rules adopted shall not be inconsistent with statute. ( Ibid.; see also People v. Mendez (1999) 19 Cal.4th 1084, 1094, 81 Cal. Rptr.2d 301, 969 P.2d 146.) Because statutes are construed to effectuate the enacting body's intent, the test for determining whether a rule that the Judicial Council has adopted exceeds statutory authority is whether the rule conflicts with the legislative intent underlying the authorization statute. (See People v. Hall (1994) 8 Cal.4th 950, 960-961, 35 Cal.Rptr.2d 432, 883 P.2d 974; In re Robin M. (1978) 21 Cal.3d 337, 346, 146 Cal.Rptr. 352, 579 P.2d 1.) Thus, a rule may be broader than the literal terms of its authorizing statute, provided it reasonably furthers the statutory purpose. ( Trans-Action Commercial Investors, Ltd. v. Firmaterr, Inc. (1997) 60 Cal.App.4th 352, 364, 70 Cal.Rptr.2d 449.) On first reading, standard 2(a)(1) appears to broaden section 1280(d)'s definition of neutral arbitrator to include a class not mentioned in the statute  arbitrators selected by a dispute resolution provider organization such as the NASDDR. Under the NASD Code, the NASDDR uses a computerized Neutral List Selection System to generate two lists of available arbitrators, one list for public arbitrators and another for nonpublic arbitrators. Each party may strike one or more of the arbitrators from each list for any reason and may rank the remaining candidates by order of preference. The NASD's Director of Arbitration then consolidates the parties' lists and appoints a panel according to their reported preferences, but if the number of remaining arbitrators is insufficient to fill the panel, the Director may appoint one or more arbitrators not named on the lists submitted to the parties. (NASD Code, rule 10308(b), (c).) Thus, although the parties' preferences play a role in the process, the NASDDR both limits the pool of potential arbitrators and, through its Director of Arbitration, makes the final selection. Whether this method of selection is consistent with section 1280(d)'s definition of neutral arbitrator depends on what that definition means when it refers to an arbitrator selected jointly by the parties. Does it require that the parties directly and personally agree to the particular individual who is to serve as arbitrator, or is it sufficient that the parties have jointly agreed to a selection method or procedure, even though the method or procedure authorizes a third party to make the final determination? On this point, the statutory language is ambiguous. To determine the legislative intent underlying section 1280(d)'s definition of neutral arbitrator, we consider its legislative history. In 1956, the Legislature, by a concurrent resolution, authorized the California Law Revision Commission to study, among other things, whether the statutes relating to arbitration should be revised. (Stats.1956, ch. 42, p. 264.) In December 1960, the commission submitted its report and recommendations, which included adoption of a statutory definition of neutral arbitrator. (Recommendation and Study Relating to Arbitration (Dec.1960) 3 Cal. Law Revision Com. Rep. (1961) pp. G-1, G-12.) The Legislature enacted the definition of neutral arbitrator exactly as the commission had recommended. (Compare id., p. G-12 with § 1280(d).) Reports of commissions which have proposed statutes that are subsequently adopted are entitled to substantial weight in construing the statutes. [Citations.] This is particularly true where the statute proposed by the commission is adopted by the Legislature without any change whatsoever and where the commission's comment is brief, because in such a situation there is ordinarily strong reason to believe that the legislators' votes were based in large measure upon the explanation of the commission proposing the bill. ( Van Arsdale v. Hollinger (1968) 68 Cal.2d 245, 249-250, 66 Cal.Rptr. 20, 437 P.2d 508; accord, People v. Martinez (2000) 22 Cal.4th 106, 129, 91 Cal.Rptr.2d 687, 990 P.2d 563.) Regarding the meaning of neutral arbitrator, the commission stated: When a tripartite arbitration board is appointed, it is usually composed of a representative of each of the contending parties and a third arbitrator chosen by the other two or by some other pre-determined procedure. The third arbitrator, who is the neutral arbitrator, often acts as the chairman of the board.... [¶] It is suggested that the California statute should distinguish the arbitrators by their titles. The arbitrators appointed by both parties, or by the two arbitrators chosen by the parties, or appointed by the court, or any other disinterested agency, should be designated the `neutral arbitrator' .... The arbitrators representing the parties should be designated `party arbitrators'.... (Recommendation and Study Relating to Arbitration, supra, 3 Cal. Law Revision Com. Rep., p. G-42, italics added; see also id. at pp. G-7 to G-8.) This comment indicates that the primary purpose of the statutory definition of neutral arbitrator was to distinguish arbitrators chosen in a manner likely to ensure their neutrality and impartiality from an arbitrator selected by one party unilaterally to act as an advocate for that party's interests. The definition was not intended to exclude arbitrators selected by a neutral third party, like an arbitration provider or administrator, to which the parties had mutually assigned that responsibility. On the contrary, it was intended to include arbitrators chosen by any disinterested agency to which the parties mutually entrusted the task of appointing an impartial arbitrator. This understanding of the meaning of neutral arbitrator is also consistent with the legislative intent underlying the 2001 legislation that authorized the Judicial Council to formulate and adopt the California Standards. Nothing in the enactment history of that legislation suggests a legislative intent to exempt from the California Standards all arbitrators appointed by arbitration providers. Rather, the documented concerns underlying the legislation, relating to the fairness of private contractual arbitration, strongly suggest an intent to apply the standards to contractual arbitration generally. For example, a report by the Assembly Committee on the Judiciary noted that the growing use of private arbitrators  including the imposition of mandatory, pre-dispute binding arbitration contracts in consumer and employment disputes  has given rise to a largely unregulated private justice industry. (Assem. Com. on Judiciary, Analysis of Sen. Bill No. 475 (2001-2002 Reg. Sess.), supra, p. 4.) The report stated that the proposed legislation seeks to provide basic measures of consumer protection with respect to private arbitration, such as minimum ethical standards and remedies for the arbitrator's failure to comply with existing disclosure requirements. ( Id., p. 1.) A Senate floor analysis stated that this legislation would apply to an appointed arbitrator in non-judicial (private or contractual) arbitrations, that it would address concerns of fairness by requiring private arbitrators to comply with ethical guidelines to be established by [the] Judicial Council, and that proponents of the legislation argued that strict ethical guidelines should apply to private arbitrators to ensure that parties to the arbitration can have confidence in the integrity and fairness of the private arbitrator. (Sen. Rules Com., Off. of Sen. Floor Analyses, Analysis of Sen. Bill No. 475 (2001-2002 Reg. Sess.) Sept. 6, 2001, pp. 1, 4-5.) We may properly consider these legislative documents in determining legislative intent. (See People v. Cruz (1996) 13 Cal.4th 764, 773, fn. 5, 55 Cal.Rptr.2d 117, 919 P.2d 731.) Interveners the NASDDR and the NYSE point out that the staff of the Judicial Council, in a report to the members of the Judicial Council dated April 9, 2002, stated that the then proposed definition of neutral arbitrator in standard 2(a) expands upon the definition of `neutral arbitrator' in Code of Civil Procedure section 1280(d), which does not include arbitrators appointed by a dispute resolution provider organization or by any party acting alone, even if those arbitrators are to serve impartially. (Italics added.) Interveners argue that this statement somehow proves that standard 2(a) is inconsistent with section 1280(d) and that the Judicial Council exceeded its authority in adopting it. We are unpersuaded. The comments by the Judicial Council staff to members of the Judicial Council in 2002 are not probative of the legislative intent underlying either the 1961 enactment of section 1280(d) or the 2001 enactment of section 1281.85(a). Moreover, as we have explained, the test is not whether the rule adopted is broader than the literal terms of its authorizing statute, or a related statute, but whether the rule adopted reasonably furthers the purpose underlying the statutory authorization. Given the relevant legislative history, we agree with the Court of Appeal in this case that the Legislature, when it enacted section 1281.85(a) in 2001, intended to authorize the Judicial Council to formulate and adopt ethical standards for neutral arbitrators in private (nonjudicial) arbitration generally, including neutral arbitrators appointed by third-party dispute resolution providers like the NASDDR.