Businesses choose contractual arbitration for many practical reasons: it’s seen as a cheaper, faster and more confidential alternative to traditional litigation, and it avoids the emotions of a jury. Arbitration, of course, is not without its risks, especially where the arbitrator can fashion relief that is “just and fair under the circumstances.” Heeding the guidance of Advance Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, businesses therefore often require the application of California substantive law in their arbitration clause in an effort to restrict the arbitrator’s discretion. According to a recent decision by the California Court of Appeal in Mastick v. T. D. Ameritrade, Inc. (Oct. 9, 2012, N. O. B238070) ___ Cal.App.4th ____, however, the mandatory application of California law can lead to the loss of the contractual right to arbitrate.
In Mastick, plaintiff sued her accountant (Safris), her investment advisor (Oakwood) and her broker dealer (Ameritrade). Oakwood and Ameritrade both petitioned to compel arbitration. Mastick’s arbitration agreement with Oakwood required arbitration before the American Arbitration Association (AAA) and expressly provided that any dispute would be governed by California law. Mastick’s arbitration agreement with Ameritrade, however, chose FINRA as the forum and specified Nebraska law for any dispute between those two parties. There was no arbitration agreement between Mastick and Safris.
Seeking to avoid piecemeal litigation, Mastick successfully asked the trial court to apply California Code of Civil Procedure Section 1281.2(c) to both arbitration petitions. Section 1281.2(c) permits a court to deny enforcement of an arbitration agreement to avoid conflicting rulings on common issues of law or fact. Section 1281.2(c) therefore would have stayed both Ameritrade’s FINRA arbitration and Oakwood’s AAA arbitration, and kept all the parties in the Superior Court.
The Court of Appeal reversed the trial court’s uniform application of Section 1281.2(c) because Mastick’s arbitration agreements with Ameritrade and Oakwood applied differing law. The Court of Appeal concluded that Ameritrade’s arbitration clause, which called for Nebraska law, would be governed by the Federal Arbitration Act (“FAA”). Because Nebraska law did not have a provision like Section 1281.2(c), the FAA therefore preempted any other choice of law considerations, and Ameritrade’s petition to compel arbitration should have been granted. Oakwood’s arbitration, however, would be stayed under Section 1281.2(c) due to its California law provision; the express requirement of California law was not preempted by the FAA. Ironically, had Oakwood’s arbitration clause been silent on governing law, the FAA would have applied and Oakwood could have proceeded in arbitration.
What is the lesson? If making sure that your claims are arbitrated is an overriding goal and your transaction involves multiple parties , then be sure to review the arbitration provisions in all the contracts in the transaction chain and negotiate uniformity if you can. Doing so may mean giving up your California law requirement, but your wish for California law can end up costing your right to arbitrate if your transaction involves multiple parties with differing or no arbitration agreements.
If you have any questions, please contact Robert Bleicher at email@example.com or at (650) 342-9600.