california courts face tough arbitration questions

AlternativesTO THE HIGH COST OF LITIGATION

INTERNATIONAL INSTITUTE FOR CONFLICT PREVENTION & RESOLUTION VOL. 24 NO. 10 NOVEMBER 2006

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TO THE HIGH COST OF LITIGATION

Publisher:Susan E. Lewis John Wiley & Sons, Inc.

Editor: Russ Bleemer

Jossey-Bass Editor: David Famiano

Production Editor: Chris Gage

VOL. 24 NO. 10 NOVEMBER 2006 ALTERNATIVES 171

Published online in Wiley InterScience (www.interscience.wiley.com).Alternatives DOI: 10.1002/alt

ADR BRIEF • ADR BRIEF • ADR BRIEFCALIFORNIA COURTS FACE TOUGH ARBITRATION QUESTIONS

It’s likely that the California SupremeCourt will get a shot at two red-hot arbi-tration law issues in the near future—con-tracting for judicial review, and class-action authorization.

Satellite television provider DirecTVInc. was mulling a petition to the Court atpress time, after losing its California stateappellate court bid to uphold a lower courtruling that overturned an award permit-ting a class action arbitration against thecompany.

But the unsettled law in the 31-pageopinion in Cable Connection Inc, et al. v.DirecTV Inc., No. B188278 (Cal.App.2d Dist. Sept. 22, 2006) (available athttp://www.courtinfo.ca.gov/opinions/-documents/B188278.PDF), as well as thecontentious of the litigation betweenDirecTV and dealers that once sold andinstalled the service and its products, makea certification petition a natural next step.

The arbitration agreement in the caseis silent on class arbitration. The dealersinitially brought a nationwide class actionin an Oklahoma state court, which theappeals court opinion says “apparentlydirected” the dealers to file an arbitrationdemand in California state court.

The appellate court decision empha-sizes that it is not authorizing a class, butmerely interpreting the arbitration provi-sion in the dealer agreements as permittingthem.

As a result, the opinion highlights theextensive procedural process needed toaccommodate class requests—and the liti-gation that inevitably follows—longbefore the arbitration’s substantive issuesare examined.

The dealers claim that they are owedtens of millions of dollars in unpaid salescommissions. Now that the appeals panelhas allowed a class to be formed, the deal-ers will ask the arbitrators to certify aclass—which will result in rulings that arealmost certain to be back in court beforethe arbitrators get to the merits.

That is, if a Supreme Court petition to

review the current decision permitting theclass doesn’t delay the arbitration panel’sconsideration of the class certificationissue even longer.

Cable Connection has an additional layerof arbitration law controversy. The appel-late decision also concludes that an arbitra-tion agreement provision withholding fromthe arbitrators “the power to make errors oflaw,” and subjecting errors to judicialreview, is void and unenforceable.

The unanimous appellate panel, in anopinion written by Second District,Fourth Division Court of Appeal AssociateJustice Thomas L. Willhite Jr., concludesthat the parties cannot contractuallyexpand trial court jurisdiction to permitreview of arbitration awards for legal error.The opinion turns back DirecTV’s chal-lenges to the award—reversing a Nov. 11,2005, trial court decision—based on thearbitrators’ exceeding their powers.

It cites Crowell v. Downey CommunityHospital Foundation, 95 Cal.App.4th 730(2002), which found that contract lan-guage allowing court review to strike anarbitration award where it “is not sup-ported by substantial evidence or is basedupon an error of law” is void and unen-forceable, because the Californian Legisla-

ture had “clearly set forth” trial court arbi-tration award review jurisdiction.

The Crowell holding relies on a semi-nal state Supreme Court arbitration juris-diction case, Moncharsh v. Heily & Blase, 3Cal.4th 1, 11 (1992), which limits trialcourt review on private arbitration awards.Moncharsh holds that arbitrators’ decisionsgenerallly aren’t reviewable for errors offact or law—the power apparently desig-nated to the court by the DirecTV dealeragreement.

“At some point the California SupremeCourt will have to tackle the seeming con-flict between the Moncharsh rule of limitedreviewability and the fact that one of thestatutory grounds of review is that thearbitrators exceed their powers,” notes vet-eran Menlo Park, Calif., solo attorney andneutral, James R. Madison, a former Cali-fornia Dispute Resolution Council presi-dent, in an E-mail to Alternatives.“Whether the Court will choose to use thiscase as a vehicle for addressing that issue isanother matter,” he adds.

The Cable Connection appellate panelsevered the judicial review provision. Itconcludes that the arbitrators didn’t violate

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“any express provisions” of the parties’agreement. The panel asked the trial courtto enter a new order confirming the awardthe trial court previously set aside.

For now, DirecTV attorney Michael E.Baumann, a partner in the Los Angelesoffice of Kirkland & Ellis LLP, says that hisclient is considering filing a petition for cer-tification with the California SupremeCourt. Under California rules, the petitionwould have to be filed by early November.

Says Baumann, “I think this is a casewhich should be of interest to people in thecommunity for a lot of reasons.” But hedeclines further comment, citing DirecTVpolicy during pending litigation.

Former Kirkland partner Andrew E.Paris, now a partner in Reed Smith’s LosAngeles office, who also representsDirectTV, also declined to comment, via E-mail.

The dealers will push for the arbitra-tion, to consider class certification as per-mitted by Cable Connection, to beginimmediately. The dealers’ attorney, DanielA. Osborn, name partner in New York’sBeatie and Osborn, says, “Our intention isto write to the arbitrators for a schedulingconference. We’re doing it knowing thatDirecTV will appeal and ask them to stay.”

DirecTV’s stay request before the cur-rent matter was successful. But this time,Osborn says, he believes the AmericanArbitration Association panel administer-ing the case will rule differently. Referringto the first stay granted while the case wasbefore the appeals court, Osborn asks,“Why should the plaintiffs wait another16 months, especially since the appealisn’t automatic?”

Osborn says he expected to contactthe arbitrators on the plaintiffs’ behalf asAlternatives went to press in the thirdweek of October, and that the potentialclass has 6,000 to 10,000 satellite televi-sion dealers nationwide.

[The AAA maintains a class-action arbi-tration page with links to each of the casesit is administering. Cable Connectiondemands, notices, court orders, and anaward and its amendment are available at

www.adr.org/sp.asp?id=22316.]The delay, in fact, is what Osborn says

was at the root of the appellate court deci-sion. “It came down to [the panel’s] viewthat the case was filed in February 2004,”says Osborn, “and we are now only in ‘StageOne’ for the procedure in handling classactions.” He adds that, even though classcertification is the next step, “you can’t getthere until you finish at the state SupremeCourt.”

Worse, says Osborn, is that once theparties are in the certification process, thereprobably will be discovery, motions, andrulings that will be subject to appeal,“depending on who wins.”

This defeats the process’s purposes, hesays, concluding, “What got to [the appealspanel] is that it has been two-and-a-halfyears.”

The opinion didn’t emphasize thedelay strongly, covering instead plenty oflegal points. In addition to the class andreview issues, the opinion rejected

• the trial court ruling that the arbitra-tors exceeded their power because theydisregarded express provisions of thearbitration agreement,

• DirectTV’s argument that the arbitra-tors exceeded their power by relyingon cases that assert class arbitration isprocedural law, while the dealers’agreement requires the application offederal procedural law and Californiasubstantive law,

• DirectTV’s contention that the arbi-trators ignored “relevant extrinsicevidence,”

The appellate panel also asked forsupplemental briefing on severability. Itultimately removed the invalid reviewstandard, upheld the arbitration agree-ment, and reinstated the award over-turned by the trial court.

On the class issue, Cable Connectionalready is at least partly an anachronism.The dealers’ contracts are from the secondhalf of the 1990s. The U.S. Supreme Courtin Green Tree Financial Corp. v. Bazzle, 539U.S. 444 (2003), gives arbitrators thepower to permit class consolidation in arbi-

tration in a contract that was silent on theissue. At the same time, the case makes itextremely likely that post-Bazzle contractswill exclude provisions eliminating class orcollective actions, preventing this issuefrom arising.

But, like with DirecTV’s dealer agree-ments, older “silent” contracts remain, andmore potential class situations could arisethat have to deal with the contract silence.

Moreover, the California panel alsoinvokes the recent state Supreme Courtdecision in Discover Bank v. SuperiorCourt, 36 Cal.4th 148 (2005). The caseholds that “class actions and arbitrationsare, particularly in the consumer context,often inextricably linked to the vindica-tion of substantive rights.”

The appeals court, therefore, disagreedthat permitting classwide arbitration wasonly a procedural decision. It notes thatholdings in two other class action casesconstitute substantive law, not, asDirecTV contended, only proceduralrules. Blue Cross of Calif. v. Superior Court,67 Cal.App.4th 42 (Cal. App. 2d Dist.1998), and Keating v. Superior Court, 31Cal.3d 584 (Cal. S. Ct. 1982), give “arbi-trators discretion to order classwide arbi-tration even where the arbitration agree-ment is silent on that issue,” writes Asso-ciate Justice Willhite in Cable Connection,“in divergence from the general rules ofcontract interpretation that terms are notto be inserted into contracts.”

Even dealers’ attorney Osborn isunsure about the reach of the substantiverights ruling. “I don’t know how manycourts will agree with that,” he says,adding, “Fortunately, there are a numberof other grounds in the opinion that sup-port the decision.”

* * *

Contract drafters also are at the center ofthe judicial review controversy. Commercialarbitration is governed by private contractsthat deal with arbitration’s subject andscope. And from a drafter’s perspective—aswell as courts’—the contract covers thescope of the arbitration award rulings.

That sets up a clash between the par-ties’ intent when they contract on the sub-

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ADR BRIEF • ADR BRIEF • ADR BRIEFject of arbitrators’ powers, and statutessuch as California Code of Civil Proceduresections 1286.2 and 1286.6, which estab-lish grounds for arbitration judicial reviewon, respectively, vacating and correctingawards. The Moncharsh case points outthat “[a]n error of law is not one of thegrounds” for altering an award, accordingto the Cable Connection appellate decision.

This leads to the source of the need toreverse the trial court, according to theWillhite opinion: The contract languagethat the arbitrators “‘shall not have thepower to commit errors of law or legal rea-soning,’ has no effect on the availability ofjudicial review for errors of law.”

The opinion notes that the agree-ment couldn’t invoke “a court of compe-tent jurisdiction” to correct errors. WroteWillhite, “we are in accord with theappellate courts that have previouslyconsidered the effect of similar languageand concluded that parties cannot con-tractually expand the jurisdiction of thetrial courts to permit review of arbitra-tion awards for legal error.”

The panel’s additional federal courtanalysis, looking to the Ninth U.S. CircuitCourt of Appeals for support, provides alook into the depth of the difference ofopinion on the issue. Noting that theCable Connection agreement is governedby the FAA, the state panel discusses a cir-cuit split on whether parties can contractfor expanded judicial review of arbitrationawards under the FAA. It adopts the NinthCircuit holding that private powers haveno power to expand the FAA in Kyocera v.Prudential-Bache, 341 F.3d 987 (9th Cir.2003)(en banc).

Kyocera, like the state court Crowellruling, found that parties can’t expand thecourt’s jurisdiction. But the panel notesthat while the Seventh and Tenth Circuitshave found similarly, four other circuitcourts ruled that the FAA doesn’t preventparties from agreeing to expanded judicialreview standards.

The divergence provides a classic the-ory argument for practitioners who claimthat their clauses merely remove arbitra-tors’ authority to do certain things, and donot confer jurisdiction on courts.

The immediate issue for practition-ers, says plaintiffs’ attorney DanielOsborn, is to take even greater care at thedrafting stage. “All states have restric-tions and/or parameters on what is a per-missible basis for challenging an arbitra-tion provision,” he says. “If you allowbroad review, you are frustrating theobjective of arbitration.”

* * *

At press time, the California SupremeCourt already was considering a Mon-charsh reviewability issue in another case.

On Oct. 5, the employers in Baize v.Eastridge Cos., et al., No. B185823(Cal.App.4th Aug 25, 2006), asked thestate Supreme Court to reconsider theirlosing appellate court argument, whichsays that an arbitrator incorrectly appliedCalifornia law.

A unanimous Second District, Divi-sion Three appeals panel opinion foundthat while “the arbitration agreementexpressly limited the arbitrator to theapplication of California law, it did notexpressly expand the scope of judicialreview. The parties in this case contractedonly for a binding arbitration in which thearbitrator applied California law. This iswhat they received. . . . There is no sug-gestion in the record that the arbitratorpurported to apply any law other than thatof California. It is simply claimed that hedid not do so correctly. . . . Therefore, therule of Moncharsh applies, and the arbitra-tor’s decision is not reviewable.”

The employers—related private com-panies that worked on public educationprojects—lost an arbitration matter to aformer employee. The arbitrator found theformer employee was wrongfully termi-nated under his employment agreement,and awarded him nearly $900,000 plusinterest and costs.

In its papers asking the Court to takethe case, the defendants state that theappeals court flatly misses Moncharsh’spoint. They asked the Court to reassertMoncharsh’s reviewability standard toreemphasize parties’ contractual freedomto determine their own processes.

The defendants’ petition brief argues

that, given the law on judicial review, theBaize clause would be voidable and unen-forceable under Moncharsh, but notunder Cable Connection and Crowell. Itasks the Court to clarify the situation,noting that Cable Connection, Crowell,and others interfere with parties’ freedomto contract.

“Our position is that the law is wellsettled,” counters the plaintiff ’s attorney,Michael M. Hernandez, of the LawOffices of Lyle F. Greenberg in WoodlandHills, Calif. “All of the cases . . . cited sayit is not reviewable,” he says, claimingthat Cable Connection and Crowell sup-port his client’s case. The Cable Connec-tion panel cites Baize to support the pointthat the arbitrators applied their law inaccordance with the arbitration agree-ment terms.

Hernandez contends that the Baizeplaintiff ’s employment agreement arbitra-tion provision is only a choice-of-law clause.

“It’s very frustrating,” says name part-ner Lyle Greenberg, noting that theplaintiff was terminated in August 2003,and the arbitration conducted in Novem-ber 2004. “The plaintiff thought at thevery least he was contracting to an expe-ditious and less expensive process. Itturned out it was not expeditious and notless expensive.”

At press time, Hernandez and Green-berg were preparing a response to theCourt petition and supporting brief.

Michael R. Palumbo, a partner in thePhoenix office of Jennings, Strouss &Salmon, who represents the employer andworked on the petition, declined com-ment, citing the continuing litigation.

* * *

CPR Intern Ongmu Tshering origi-nated CPR’s reporting on Cable Connection in a Sept. 29 item on theRecent News feature at www.cpradr.org. This article, written byAlternatives editor Russ Bleemer,adapts some of the Cable Connectionfacts from the Web site article. �

DOI 10.1002/alt.20153

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california courts face tough arbitration questions

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