Defining and Transforming Arbitration Amid the Uncertainties of Public Policy |
Association
of Business Trial Lawyers
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In Southland Corp. v. Keating, 465 U.S. 1 (1984), the United States Supreme
Court concluded that the Federal Arbitration Act ("FAA") preempted
all state statutory and decisional law prohibiting or inhibiting arbitration
of claims within the scope of the federal statute. New York had previously
enacted a state statute authorizing arbitration and the California Supreme
Court subsequently endorsed arbitration unequivocally. Although designed
to eliminate civil discovery, reduce costs of dispute resolution and expedite
disposition of claims, the promise of arbitration has come under siege.
Initial legislative attempts to offer an alternative to litigation have
eroded under decisional law, and arbitration increasingly resembles litigation
as courts invoke legal analysis of arbitral issues in terms of substantive
and procedural civil law. Aside from philosophic objections to arbitration in general, and its
elimination of jury trials in particular, federal and state arbitration
statutes invite judicial interpretation in the language of litigation.
The FAA authorizes courts to invalidate or deny enforcement of arbitration
clauses in contracts on grounds of "law and equity", two words
importing substantial historical content for interpretation of contract
law. The California statute similarly authorizes arbitration..."[unless]
grounds exist for the revocation of any contract." The Supreme Court and the California Supreme Court have held that the
language of these two statutes authorizes the court to determine whether
an arbitration clause in a contract exists, the scope of claims subject
to arbitration and the parties signatory to, or bound by, the contract.
Exercise of this judicial power, characterized as the role of "arbitrability,"
decides the fate of a petition requesting the court to order arbitration.
Determining 'Arbitrability' Superficially, determining "arbitrability" is a mundane task
for the court but complications have arisen. A state trial judge in California
confronted with a petition to compel arbitration labors under the appellate
court description of the proceeding as a "suit in equity to compel
specific performance." This familiar litigation rhetoric immediately
transforms analysis of a petition into the familiar landscape of civil
law. Accordingly, under the rubric of "substantive" arbitrability
the court incorporates the world of substantive contract law, and 'procedural"
arbitrability embraces civil procedure. Aside from the staples of substantive contract interpretation; i.e., ambiguous arbitration clauses multiple clauses, expired contracts, counterclaims, unconscionable contracts, third party beneficiaries, collateral estoppel and res judicata, the courts resolve procedural issues of statutes of limitation, laches, conditions precedent, forum selection, consolidation and severance of claims. "Arbitrability " includes resolution of sensitive jurisdictional disputes between federal and state courts confronting the doctrine of abstention, the role of the Anti-Injunction Act, and the All Writs Act. The paradox: litigation language applied to the alternative to litigation.
In California, the latest judicial inroad to enforceability of an arbitration
clause revocable on "grounds existing for any contract', is the litigation
doctrine of "public policy." This concept, neither substantively
or procedurally sufficient to statutorily qualify as "grounds for
the revocation of a contract" under state law (Cal. Code Civ. Proc.
§ 1281.2), nor disqualification of an arbitration clause as a matter
of "law and equity" in federal law (9 U.S.C. § 2), is now
"arbitrable" in California; Little v. Auto Stiegler, Inc., 29
Cal. 4th 1064 (2003). Although the plaintiff in Little had alleged a common
law cause of action, as distinct from statutory, the court drew no distinction
and applied the judicially invented "public policy" litigation
ground to deny enforcement of arbitration clause. In its seminal decision of Armendariz v. Foundation Health Psychcare
Services, Inc. 24 Cal. 4th 83 (2000), the Justices concluded the Fair
Employment and Housing Act (FEHA") imposes an unwaivable right to
litigation necessary to vindicate the purposes of the statute in the context
of a wrongful termination cause of action alleging violation of "public
policy." Despite the venerable California rule of at-will employment,
the court based its decision on Tameny v. Atlantic Richfield Co., 27 Cal.
3d 167 (1980), a non-statutory judicially declared tort doctrine authorizing
a damages award to employees discharged for reporting illegal employer
conduct. Although arguably judicial legislation, Tameny deflects criticism of
its holding. Employees ought not suffer employment loss based upon legitimate
complaints of employer wrongdoing. The court opinion is moral reasoning
clothed in the Language of the law under the rubric of "public policy".
Armendariz cites Tameny in identifying FEHA as a legislative expression
of public policy. But the California court also warns that "public
policy is not a surrogate for judicial opinions based on general welfare:
it is a doctrine carefully tethered to fundamental polices that are delineated
in constitutional or statutory provisions ... the policy must be 'public'
in that it 'affects society at large' rather than the individual, must
have been articulated at the time of discharge, and must be 'fundamental'
and 'substantial."' In Little, the court has expanded this doctrine to include common law
claims for wrongful termination allegedly indistinguishable from statutory
claims for purposes of "public policy" analysis. In the future,
the California Supreme Court may confine its expansion of the "public
policy" exception to employment cases exemplified in Armendariz and
Little, but as the Little minority contends, the Tameny doctrine was judicially
invented and not statutorily authorized. Little is an invitation to quote
almost any statute in support of a "public policy" argument
and the case is an example of questionable "tethering" a statute
to that doctrine. The merits of Armendariz and Little are not the issue. Each of these
cases exemplifies application of litigation analysis to arbitration issues
and invokes decisional law apart from legislative authorization. Introducing
a non-statutory ground to revoke an arbitration clause predicated on judicially
declared doctrine opens the door presumably shut by the legislature and
constitutes an incursion of their authority. Little and Armendariz are not the only excursions of the judiciary into
public policy as a source of avoiding arbitration. In Villa Millano HOA
v. Il Davorge, 84 Cal. App. 4th 819 (2000), the Court of Appeal invoked
CCP § 1298.7 to vitiate an arbitration clause in the sales contract
of a Homeowners Association. The court cited Cal. Code Civ. Proc. §
1298.7, a statute authorizing homeowners to initiate litigation for construction
defects, in finding a public policy exception to enforcing an arbitration
clause. The United States Supreme Court has repeatedly held that states
cannot subvert arbitration by enacting statutes specifically applicable
to contracts containing arbitration clauses. Cal. Code Civ. Proc. §
1298.7 is patently preempted by the FAA. In Phillips v. St. Mary Regional Medical Center, 96 Cal. App. 4th 218
(2002), the court allowed a cause of action for employment discrimination
to proceed on grounds that federal law adequately served as a statutory
nexus for public policy despite conflicting California legislation. In
Deschene v Pinole Point Steel Co., 76 Cal. App. 4th 33 (1999), the court
allowed a wrongful termination cause of action to proceed based on allegations
that the defendant had retaliated for giving deposition testimony in a
suit brought by a former employee. Unable to find a statute to support
a public policy argument, the court cited a Labor Code section prohibiting
an employer from penalizing an employee for taking time off to attend
a court related proceeding. Generalized notions of good social policy articulated by a court simultaneously
expressing concerns about cabining judicial power and insisting on a connection
between Constitutional/ statutory law and public policy applicable generally
and not to private claims are suspect. Any court can justify its decision
by citing the amorphous doctrine of "public policy" and linking
it tenuously to a statute or constitutional provision. The intrinsic inability
to define the contours of public policy allow verbally dexterous judicial
opinions to ignore the talismanic phrase and recharacterize it under an
ambiguous doctrine that replicates faux due process; Potvin v. Metropolitan
Life Ins. Co., 22 Cal. 4th 1060 (2000). California cases relying on public policy to exempt litigation from arbitration
are on questionable grounds. Because the FAA pre-empts state statutory
or decisional law inimical to arbitration, regardless of the underlying
merits, the Supreme Court has ruled that "Section 2 [of the FAA]
is a congressional declaration of a liberal federal policy favoring arbitration
agreements, notwithstanding any state substantive or procedural policies
to the contrary .. Congress [has] declared a national policy favoring
arbitration and withdrew the power of the states to require a judicial
forum for the resolution of claims which the contracting parties agreed
to resolve by arbitration and denied states the right to undercut the
enforceability of arbitration agreements ... Section 2, therefore, embodies
a clear federal policy of requiring arbitration unless the agreement to
arbitrate is not part of a contract evidencing interstate commerce or
is revocable upon such grounds as exist at law or in equity for the revocation
of any contract... We see nothing in the Act indicating that the broad
principle of enforceability is subject to any additional limitations under
state law." Keating, supra. Hon. Lawrence Waddington (Ret.) *** |