California Supreme Court Permits Arb Awards' Expanded Judicial Review (Web)
August 26, 2008
The U.S. Supreme Court left only a sliver of wiggle room that would allow parties to contract for heightened arbitration award judicial review in its decision in Hall Street Associates L.L.C. V. Mattel Inc., No. 06–989, (March 25, 2008)(available here ).
But less than six months later, a state Supreme Court has set limits on the tenuous loophole and created a judicial exception to the categorical Hall Street Associates rule that the Federal Arbitration Act won’t allow judicial review of arbitration awards.
In Cable Connection Inc., et al., V. DirecTV Inc., No. S147767 (Aug. 25, 2008) (available here), the California Supreme Court picks up on the U.S. Supreme Court’s aside that there may be another way to view arbitration judicial review, perhaps under civil procedure rules, other than the FAA.
In an opinion written by Associate Justice Carol A. Corrigan, the Court yesterday held that the “California rule is that the parties may obtain judicial review of the merits by express agreement. There is a statutory as well as a contractual basis for this rule; one of the grounds for review of an arbitration award is that ‘[t]he arbitrators exceeded their powers.’ ([California Arbitration Act in the Code of Civil Procedure] §§ 1286.2, subd. (a)(4), 1286.6, subd. (b).)”
Even though the nation’s top court left open the possibility for judicial review in Hall Street Associates, it didn’t look like contract drafters would be writing in such provisions any time soon.
The Court had raised the issue in unusual fashion: Nine days after oral arguments in Washington last November, the Court issued an order to the parties asking for a re-briefing on the issue–specifically, whether there was authority outside the FAA under which a party may enforce a provision for judicial review of an arbitration award.
The Court issued the re-briefing order because the arbitration arose during the case, which involved litigation over cleaning up toxins in an Oregon site that Mattel leased from Hall Street Associates. Most arbitrations begin with contract provisions agreed to at the beginning of a deal, not after litigation has started.
Even with the extra briefing, the U.S. Supreme Court passed on whether review could emanate from civil procedure rules or statutes. But the California Court Monday cited its seminal Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992)(available with sign-up at http://login.findlaw.com/scripts/callaw?dest=ca/cal4th/3/1.html), opinion in casting aside Hall Street Associates in the state, and under certain circumstances.
“Here," Justice Corrigan writes in her 5-2 majority opinion, "the parties agreed that ‘[t]he arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error.’” Continuing , she declares, “This contract provision is enforceable under state law[.]”
The opinion concludes that the award–and judicial review of the award--is governed by state law because the parties proceeded in state court, even though the arbitration was governed by federal procedural law.
The decision also finds that the arbitration panel in the case misapplied California law and the American Arbitration Association’s rules in deciding that class arbitration is a substantive right under California law, and that AAA rules allow it unless the arbitration clause forbids it. The Court sent the matter back to the arbitrators “for reconsideration under the proper legal standards.”
DirectTV has been fighting for years with its dealers, who charged in 2001 that the satellite television provider withheld commissions and assessed improper charges. A 2004 arbitration panel permitted classwide arbitration, with one dissenting arbitrator saying that the dealer agreement at issue contemplated only individual arbitrations.
A trial court vacated the award, agreeing that the majority of arbitrators had overstepped the tribunal's boundaries on the class action issue, and that the award’s errors were subject to judicial review. A California appellate court reversed, finding that the trial court shouldn’t have reviewed the merits of the arbitrators’ decision, and holding the judicial review provision unenforceable.
But the state Supreme Court reversed again yesterday, sending the case back to the arbitrators for the class determination. The opinion reasserts Moncharsh, which held that without a limiting clause, awards’ merits are not reviewable except as provided by statute. The Corrigan opinion, in analyzing the California Arbitration Act’s legislative intent, doesn’t allow a broad merits review, but instead permits a narrower, tailored examination when the parties specify the basis in their contracts–and as defined by statutory limits.
First, the California opinion rejects the idea that Hall Street Associates preempts the state law under which it allows judicial review. The “Hall Street holding is restricted to proceedings to review arbitration awards under the FAA,” writes Corrigan, “and does not require state law to conform with its limitations. Furthermore, a reading of the [California Arbitration Act] that permits the enforcement of agreements for merits review is fully consistent with the FAA ‘policy guaranteeing the enforcement of private contractual arrangements.’”
Then, proceeding with the statutory and Moncharsh analysis, the opinion says that to avoid the general rule that merits aren’t subject to judicial review, “the parties must clearly agree that legal errors are an excess of arbitral authority that is reviewable by the courts.”
The parties did that in Cable Connection, according to the opinion, with the result that they don’t have the traditional expectations of finality associated with arbitration. Justice Corrigan writes:
We do not decide here whether one or the other of these clauses alone, or some different formulation, would be sufficient to confer an expanded scope of review. However, we emphasize that parties seeking to allow judicial review of the merits, and to avoid an additional dispute over the scope of review, would be well advised to provide for that review explicitly and unambiguously.
Upholding the agreement advances ADR “by enabling private parties to choose procedures with which they are comfortable,” the majority opinion notes.
Associate Justice Marvin R. Baxter concurred, emphasizing in his opinion that “parties to an arbitration agreement may not contractually secure an arbitrary method of review.” He concludes by reserving judgment “as to what if any limitation may exist with regard to such agreements, particularly when they purport to require fragmented review of the individual issues that are part and parcel of the arbitrable controversy.”
Associate Justice Carlos R. Moreno didn’t join the majority opinion, but wrote separately both concurring and dissenting with the majority. He agrees that judicial review may be broadened under Moncharsh, but he disagrees “that parties may oblige courts to undertake fullscale [sic] judicial review of legal error in arbitration awards,” stating that the scope is more circumscribed by the legislature.
He notes that the statute allows an arbitration agreement to compel a court to vacate an award where an arbitrator addresses legal questions arbitrarily and unreasonably, “such as departing from clearly defined contract terms.”
But he warns that where an arbitrator’s view of a legal question isn’t “clearly erroneous–for example, when he or she reasonably answers a legal question in which there is no settled precedent, the statute does not authorize a court to vacate an arbitrator’s award merely because it disagrees with the arbitrator’s conclusions, no matter what the arbitration agreement provides.”
Moreno, joined by Chief Justice Ronald M. George, would have affirmed the Court of Appeal judgment in the case.