September 11, 2008 Litigation

Transcription

1 Litigation Bei j i n g Fr a n k f u r t Ho n g Ko n g Lo n d o n Lo s An g e l e s Mu n i c h Ne w Yo r k Si n g a p o r e To k y o Wa s h i n g t o n, DC The California Supreme Court Allows Parties to Agree on the Scope and Standard of Judicial Review of Arbitration Awards In ruling that parties to an arbitration agreement can establish by contract the scope of judicial review of an arbitration decision, the California Supreme Court in Cable Connection Inc., et al., v. DirecTV Inc., 1 constructed a safe passage through what appeared to be hostile terrain created by the United States Supreme Court only five months ago in Hall Street Associates L.L.C. v. Mattel Inc. 2 In a 5-2 decision 3 filed on August 25, 2008, Justice Corrigan concluded that the benefits of resolving disputes straightaway must yield to the state policy of allowing contracting parties to agree to the terms and conditions of the proceeding established to resolve their dispute. 4 While the court hinted at an outer boundary on the power of the parties to establish a standard of review by agreement flipping a coin or studying the entrails of a dead fowl, for example, would likely not be allowed the parties to a contract will be given a wide berth by the state courts in California to agree on the process and procedure for deciding how an arbitration proceeding will be conducted and reviewed. The Court stated 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 in the written agreement between the parties. The Cable Connection decision allows parties to retain the perceived speed and efficiency of streamlined arbitrations without surrendering the desire for appropriate judicial review of difficult For further information about this Client Alert, please contact: William E. Wallace III Partner, Litigation (202) wwallace@milbank.com Stuart Allen Associate, Litigation (213) sallen@milbank.com You may also contact any member of Milbank s Litigation Group. Contact information can be found at the end of this Client Alert or on Milbank s website at: milbank.com/en/ PracticeAreas/ LitigationArbitration_ alpha.htm 1 No. S147767, 2008 Cal. LEXIS U.S. (2008), 128 S. Ct (2008). 3 Justice Kennard, Justice Baxter, Justice Werdegar, and Justice Chin concurred with the majority opinion. 4 This path through the hostile terrain created by the U.S. Supreme Court was anticipated by the Client Alert on Hall Street Associates issued by Milbank on March 28, 2008.

2 2 questions of law. Parties may confidently contract to resolve their dispute by way of arbitration while simultaneously managing the risk of an errant arbitral decision by providing for a scope of judicial review broader than that which would be allowed by the Federal Arbitration Act ( FAA ) and the Supreme Court decision in Hall Street Associates. Consequently, Cable Connection underscores the importance of drafting a well constructed contract before an arbitration begins. The decision could also have the unintended effect of creating or exacerbating a race to the courthouse once an arbitral decision is announced. The winner obviously will want to limit as much as possible the avenues for review and reversal and one way to do that would be to have the Hall Street Associates rule apply during the postarbitration proceeding. To that end, the winner will have a strong incentive for doing whatever can be done to have the review process occur in federal court rather than California state court (or in any other court that might follow the lead of the California Supreme Court). Conversely, the loser will want as broad a standard of review as possible and that most likely will be found in a California state court, or, once again, in a state court of any state likely to follow the lead of California. However, success ultimately will depend on more than winning the race to the clerk s office. To deploy successfully the holding of Cable Connection, the party will need to have adequate support in the contract. The time to address the language of the contract is now; not when you are facing the issue in court. Background Satellite television provider DirecTV entered into contracts with retail dealers to provide customers with the equipment needed to receive its satellite signal. Those agreements included arbitration clauses that stated that the arbitrators would not have the power to commit errors of law or legal reasoning, and [that] the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error. Dealers from four states brought suit in Oklahoma, asserting on behalf of a nationwide class that DirecTV had wrongfully withheld commissions and assessed improper charges. DirecTV successfully moved to compel arbitration. The contract provided that the situs of the arbitration would be California, and also provided that the arbitration would be governed by the United States Arbitration Act, the rules of the American Arbitration Association ( AAA ) and the substantive law of California. It was also stipulated that the underlying contract involved interstate commerce. The arbitration panel from the AAA first addressed whether the parties agreement permitted the arbitration to proceed on a classwide basis and concluded that even though the contract is silent and manifests no intent on this issue, arbitration on a classwide basis was authorized under precedential state law. The majority of the panel deemed the question one of substantive California law, though it also relied on AAA rules and policy governing class arbitration. The award was clear that class arbitration was not necessarily required in this case; it was merely permitted by the contract. DirecTV filed a petition to vacate the award in the California state court. Both parties proceeded on the assumption that the California Arbitration Act ( CAA ) governed the proceeding. The trial court vacated the decision of the arbitrator. The Court of Appeal reversed, holding that the trial court had exceeded its jurisdiction by reviewing the merits of the arbitrators decision. 5 The California 5 The California Supreme Court s review of the issue of whether classwide arbitration available under an agreement that is silent on the matter resulted in a reversal of the Court of Appeal and a remand to arbitration.

3 3 Supreme Court reversing held that [t]he California rule is that the parties may obtain judicial review of the merits by express agreement. (emphasis added). The Supreme Court s Decision Cable Connection is a modification of previous law established by the California Supreme Court. In 1992, the Court held in Moncharsh v. Heily & Blase that in the absence of some limiting clause in the arbitration agreement, the merits of the award, either on questions of fact or of law, may not be reviewed except as provided in the statute [the CAA]. 6 In Cable Connection, the Court explained that Moncharsh discussed how the drafters of the CAA established the statutory grounds for judicial review with the expectation that arbitration awards are ordinarily final and subject to a restricted scope of review, but that parties may limit the arbitrators authority by providing for review of the merits in the arbitration agreement. 7 Nevertheless, in the time since the Moncharsh decision, no Court of Appeal had enforced a contract clause calling for judicial review of an arbitration award on its merits. To reach this decision, the California Supreme Court distinguished Hall Street as only applicable to federal cases in federal courts using the FAA. In contrast to the U.S. Supreme Court, the California Supreme Court gave significant weight to policy considerations favoring the enforcement of contractual arbitration arrangements. The U.S. Supreme Court concentrated on whether the FAA has textual features at odds with enforcing a contract to expand judicial review following the arbitration. 8 Conversely, the California Court focused its analysis on the reasons that parties contract to utilize arbitration ab initio and stated that [i]ncorporating traditional judicial review by express agreement preserves the utility of arbitration as a way to obtain expert factual determinations without delay, while allowing the parties to protect themselves from perhaps the weakest aspect of the arbitral process, its handling of disputed rules of law. In its lengthy consideration of the policy justifications for its holding, the California Supreme Court stated that [t]he benefits of enforcing agreements like the one before us are considerable, for both the parties and the courts. The development of alternative dispute resolution is advanced by enabling private parties to choose procedures with which they are comfortable. Agreeing with commentators, the Court recognized that provisions for expanded judicial review are a product of market forces operating in an increasingly judicialized arbitration setting that feature many of the attributes of court proceedings. The Court fashioned its holding to address the desire of parties to have protection from legal error by arbitrators a desire resulting from the experience of sophisticated parties in high stakes cases, where the arbitrators awards deviated from the parties expectations in startling ways. Moreover, the Court recognized that [t]he judicial system reaps little benefit from forcing parties to choose between the risk of an erroneous arbitration award and the burden of litigating their dispute entirely in court. Enforcing contract provisions for review of awards on the merits relieves pressure on congested trial court dockets. 6 Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 25 (citations omitted). 7 See Moncharsh, 3 Cal.4th at p Hall Street, U.S. at, 128 S.Ct. at 1404.

4 4 The Dissent Writing for the dissent, Justice Moreno agreed with the majority to the extent that it held that parties may define the arbitrator s powers in such a way as to broaden somewhat the scope of judicial review beyond the usual narrow grounds for such review set forth in Moncharsh... 9 His dissent focused on the scope of review that the majority provided dissatisfied parties to arbitrations. According to Justice Moreno, the relevant statutes and pertinent legislative history reveals a legislative intent to circumscribe the scope of judicial review and defer to the judgment of the arbitrator. The dissent read the applicable statutes to permit parties to contract to compel a court to vacate an award where an arbitrator acts unreasonably and arbitrarily in addressing legal questions, but not to permit parties to appeal an arbitration award to a court where the arbitrator s answer to a legal question was not clearly erroneous. To Justice Moreno, the majority opinion overstepped the applicable statutory language. Practical Implications Parties looking to minimize the risk of a renegade arbitral decision while simultaneously taking advantage of the efficiencies of the arbitration process are advised to focus on at least two critical points. First, the parties should provide for heightened review explicitly and unambiguously in the agreement. There are two components to such explicit and unambiguous drafting proper language and proper law. In Cable Connection, the parties specifically contracted that the arbitrators would not have the power to commit errors of law or legal reasoning, and [that] the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error. By using such language, parties can stay within the boundaries of the CAA which, as stated clearly in Cable Connection, authorizes review on the ground that an award exceeds the arbitrators powers. In addition, parties should also write clear choice of law provisions to avoid the possibility of a federal court applying the FAA as procedural law instead of the CAA a situation that would negate the opportunity for heightened review provided by Cable Connection. A choice of law provision calling for California substantive and procedural law would address this point. The second lesson from this decision is for the parties to act expeditiously after a decision is announced to maximize the ability to be in the forum that will be most hospitable to the ultimate goal of the litigant. If you are the party that received the short straw from the arbitration, you might want to consider the advantages of being in a California state court if possible. If you are the party that prevailed, you might want to be in federal court where, all other things being equal, it is more likely that the Hall Street Associates rule will be applied. Under Cable Connection, careful practitioners can draft contracts with arbitration clauses that provide for a level of judicial review reflecting the desires of the parties while possessing a reasonable expectation that the intention of the parties, as reflected in their agreement, will be enforced by the judiciary. * * * * * * * * This Client Alert is a source of general information for clients and friends of Milbank. Its content should not be construed as legal advice, and readers should not act upon the information in this Client Alert without consulting counsel. 2008, Milbank, Tweed, Hadley & McCloy LLP. All rights reserved. Attorney Advertising, prior results do not guarantee a similar outcome. 9 Chief Justice George joined in the dissent.

5 For further information about this client alert, please visit our website at or contact one of the Litigation partners listed below. New York Wayne M. Aaron Thomas A. Arena Sander Bak Jeffrey Barist James N. Benedict, Chair George S. Canellos James G. Cavoli Christopher E. Chalsen Scott A. Edelman David R. Gelfand, Practice Group Leader John M. Griem, Jr Douglas W. Henkin Michael L. Hirschfeld Lawrence T. Kass Sean M. Murphy Michael M. Murray Stacey J. Rappaport Richard Sharp Alan J. Stone Errol B. Taylor Andrew E. Tomback Fredrick M. Zullow Washington, DC David S. Cohen Robert J. Koch Andrew M. Leblanc Michael D. Nolan William E. Wallace, III Los Angeles Linda Dakin-Grimm Gregory Evans Jerry L. Marks Daniel Perry Mark Scarsi London David Perkins Offices Worldwide Beijing Frankfurt Hong Kong London Los Angeles Munich New York Singapore Tokyo Washington, DC