Cable Connection, Inc. v. DIRECTV, Inc

In Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, the parties' arbitration clause stated: "'The 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.'" (Cable Connection, supra, 44 Cal.4th at p. 1361, fn. 20.) The arbitration agreement between Jimenez and Fiorentino contained no clause prohibiting the arbitrators from committing errors of law (or of fact), defining such error as an action exceeding the arbitrators' powers, or permitting or requiring review of the arbitration award for errors of fact or law. The parties' contract may alter the usual scope of review. (Id. at p. 1340.) The California Supreme Court reaffirmed the long-standing principles of finality and limited judicial review of arbitration awards. The court held that in order "to take themselves out of the general rule that the merits of the award are not subject to judicial review, the parties must clearly agree that legal errors are an excess of arbitral authority that is reviewable by the courts." (Id. at p. 1361.) The court further observed that "parties seeking to allow judicial review of the merits of an arbitration award . . . would be well advised to provide for that review explicitly and unambiguously" in the arbitration agreement. (Ibid.) The Court recognized that an arbitration agreement may, if properly worded, require the courts to review an arbitrator's errors of law on the merits. In DIRECTV, the arbitration provision stated in part: " 'The arbitrators shall apply California substantive law to the proceeding, except to the extent Federal substantive law would apply to any claim. ... The arbitrators shall prepare in writing and provide to the parties an award including factual findings and the reasons on which their decision is based. The 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." (Id. at p. 1341, fn. 3, italics added.) DIRECTV distinguished prior case law: "In Moncharsh v. Heily & Blase (1992), the parties' arbitration clause included no provision for an expanded scope of judicial review. ... We considered and rejected the appellant's claim that the award was nevertheless reviewable for error of law on its face causing substantial injustice, a proposition which had some support in case law. ... We reaffirmed 'the general rule that an arbitrator's decision is not ordinarily reviewable for error by either the trial or appellate courts' ... , and held that the statutory grounds for review were intended to implement that rule ... ." (DIRECTV, supra, 44 Cal.4th at pp. 1354?1355.) The DIRECTV court continued: "Our reasoning in Moncharsh centered not on statutory restriction of the parties' contractual options, but on the parties' intent and the powers of the arbitrators as defined in the agreement. These factors support the enforcement of agreements for an expanded scope of review. If the parties constrain the arbitrators' authority by requiring a dispute to be decided according to the rule of law, and make plain their intention that the award is reviewable for legal error, the general rule of limited review has been displaced by the parties' agreement. Their expectation is not that the result of the arbitration will be final and conclusive, but rather that it will be reviewed on the merits at the request of either party. That expectation has a foundation in the statutes governing judicial review, which include the ground that '[t]he arbitrators exceeded their powers.' ( 1286.2, subd. (a)(4), 1286.6, subd. (b).) "We have consistently recognized that '[a]n exception to the general rule assigning broad powers to the arbitrators arises when the parties have, in either the contract or an agreed submission to arbitration, explicitly and unambiguously limited those powers. ... "The powers of an arbitrator derive from, and are limited by, the agreement to arbitrate. ..." ...' ... Our review in Moncharsh of the CAA's legislative history confirms that while the statutory grounds for correction and vacation of arbitration awards do not ordinarily include errors of law, contractual limitations on the arbitrators' powers can alter the usual scope of review." (DIRECTV, supra, 44 Cal.4th at pp. 1355-1356.) The California Supreme Court addressed whether, under the CAA, the parties may, by agreement, expand judicial review of an arbitration award to include legal error. The United States Supreme Court had decided that issue under the FAA in Hall Street Associates, L.L.C. v. Mattel, Inc. (2008) 552 U.S. 576 170 L. Ed. 2d 254, 128 S.Ct. 1396 (Hall Street), concluding that the sections of the FAA governing judicial review (9 U.S.C. 10-11) did not permit the parties to expand the scope of review by agreement. (Hall Street, at pp. 586-587.) In DIRECTV, the parties were required to arbitrate any " 'claim arising out of the interpretation, performance, or breach of this Agreement.' " (DIRECTV, supra, 44 Cal.4th at p. 1341, fn. 3.) The arbitration provision also stated: "'The parties acknowledge that the transactions contemplated by this Agreement involve commerce, as defined in the FAA.'" (Id. at p. 1342, fn. 3.) The agreement contained two choice-of-law provisions, one for substantive law and one for procedural law. The former stated: " 'The arbitrators shall apply California substantive law to the proceeding, except to the extent Federal substantive law would apply to any claim.' " (Id. at p. 1341, fn. 3, italics added.) The parties disagreed about the meaning of the procedural choice-of-law clause, which read: "'Any arbitration conducted hereunder shall be governed by the FAA.'" (DIRECTV, supra, 44 Cal.4th at p. 1342, fn. 3.) One side argued the clause required the application of the FAA's procedural provisions, including Hall Street's strict limitations on judicial review. The other side, namely DIRECTV, Inc., contended "the FAA provisions governing judicial review are specific to federal courts; ... and ... the clause calls only for the arbitration itself to be governed by the FAA, not postarbitration proceedings in court." (DIRECTV, supra, 44 Cal.4th at pp. 1350-1351, fn. 12, italics added.) The Supreme Court concluded: "DIRECTV has the better argument. Sections 10 and 11 of the FAA refer to review by 'the United States court in and for the district where the award was made.' (9 U.S.C. 10(a), 11.) The parties' contract did not specify whether enforcement proceedings were to be brought in state or federal court ... .' " (DIRECTV, at p. 1351, fn. 12.) The enforcement proceedings in DIRECTV were brought in superior court, thus raising the question of whether the FAA's provisions governing judicial review (9 U.S.C. 10-11) applied in state court. On that point, our Supreme Court explained: "Section 2 of the FAA, declaring the enforceability of arbitration agreements, 'creates a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act.' ... The FAA governs agreements in contracts involving interstate commerce, like those in this case. ... The United States Supreme Court has frequently held that state laws invalidating arbitration agreements on grounds applicable only to arbitration provisions contravene the policy of enforceability established by section 2 of the FAA, and are therefore preempted. ... "However, 'the United States Supreme Court does not read the FAA's procedural provisions to apply to state court proceedings.' ... Sections 3 and 4 of the FAA, governing stays of litigation and petitions to enforce arbitration agreements, do not apply in state court. ... As we have noted, the provisions for judicial review of arbitration awards in sections 10 and 11 of the FAA are directed to 'the United States court in and for the district wherein the award was made.' ... We have held that similar language in sections 3 and 4 of the FAA reflects Congress's intent to limit the application of those provisions to federal courts... "... As in Cronus and Rosenthal, the FAA's procedural provisions are not controlling, and the determinative question is whether CAA procedures conflict with the FAA policy favoring the enforcement of arbitration agreements." (DIRECTV, supra, 44 Cal.4th at pp. 1350-1352.) DIRECTV found no conflict: "The terms of the parties' agreement prevail over considerations of expediency in the dispute resolution process. 'After all, the basic objective in this area is not to resolve disputes in the quickest manner possible, no matter what the parties' wishes ... , but to ensure that commercial arbitration agreements, like other contracts, " 'are enforced according to their terms,' " ... and according to the intentions of the parties ... .' ... The court has viewed the federal policy served by the FAA as 'at bottom a policy guaranteeing the enforcement of private contractual arrangements.' ... "We conclude that the Hall Street holding is restricted to proceedings to review arbitration awards under the FAA, and does not require state law to conform with its limitations. Furthermore, a reading of the CAA that permits the enforcement of agreements for merits review is fully consistent with the FAA 'policy guaranteeing the enforcement of private contractual arrangements.'" (DIRECTV, supra, 44 Cal.4th at pp. 1353-1354.) DIRECTV went on to hold that, under the CAA, parties may expand the scope of review to include errors of law if the agreement explicitly and unambiguously provides for review on the merits. (DIRECTV, supra, 44 Cal.4th at pp. 1355, 1361.) In DIRECTV, supra, 44 Cal.4th 1334, the contract involved interstate commerce, so the FAA's substantive provision (9 U.S.C. 2) applied. A choice-of-law clause concerning procedural matters stated: " 'Any arbitration conducted hereunder shall be governed by the FAA.' " (DIRECTV, at p. 1342, fn. 3.) The court concluded this language did not make the FAA's sections on judicial review (9 U.S.C. 10, 11) applicable in state court. (DIRECTV, at pp. 1350-1351, fn. 12.) Indeed, the court stated that the language of several of the FAA's procedural sections "reflects Congress's intent to limit the application of those provisions to federal courts." (DIRECTV, at p. 1351, citing 9 U.S.C. 3, 4, 10, 11; see also DIRECTV, at pp. 1351-1352.) The Supreme Court held in DirecTV that an "expanded scope of review would be available under a clause specifically tailored for that purpose." (DirecTV, supra, 44 Cal.4th at p. 1345.) But "to take themselves out of the general rule that the merits of the award are not subject to judicial review, the parties must clearly agree that legal errors are an excess of arbitral authority that is reviewable by the courts." (Id. at p. 1361.) In DirecTV, the parties' arbitration clause stated: "'The 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.'" (DirecTV, supra, 44 Cal.4th at p. 1361, fn. 20.) The Supreme Court concluded the first clause of this formulation "depriveed the arbitrators of the power to commit legal error" and the second clause "specifically provided for judicial review of such error." (Id. at p. 1361.) The court did not decide "whether one or the other of these clauses alone, or some different formulation, would be sufficient to confer an expanded scope of review," but "emphasized 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." (Ibid.)