CABLE CONNECTION INC. v. DIRECTV INC.

44 Cal.4th 1334

190 P.3d 586

82 Cal.Rptr.3d 229

CABLE CONNECTION, INC., et al., Plaintiffs and Appellants,

v.DIRECTV, INC., Defendant and Respondent.

No. S147767.

Supreme Court of California

Aug. 25, 2008.

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Beatie and Osborn and Daniel A. Osborn, New York, NY, for Plaintiffs and Appellants.

Reed Smith, Margaret A. Grignon, Andrew E. Paris, Los Angeles; Kirkland & Ellis, Michael E. Baumann, Los Angeles, and Becca Wahlquist, for Defendant and Respondent.

Horvitz & Levy, Barry R. Levy, Jeremy B. Rosen and Alicia A. Pell, Encino, for L.F.P., Inc., as Amicus Curiae on behalf of Defendant and Respondent.

CORRIGAN, J.

This case presents two questions regarding arbitration agreements. (1) May the parties structure their agreement to allow for judicial review of legal error in the arbitration award? (2) Is classwide arbitration available under an agreement that is silent on the matter?

On the first question, the United States Supreme Court has held that the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.) does not permit the parties to expand the scope of review by agreement.

( Hall Street Associates, L.L.C. v. Mattel, Inc. (2008) 552 U.S. 576, 128 S.Ct. 1396, 1404-1405, 170 L.Ed.2d 254 ( Hall Street ).) However, the high court went on to say that federal law does not preclude “more searching review based on authority outside the [federal] statute,” including “state statutory or common law.” ( Id. at p. 590, 128 S.Ct. at p. 1406.) In Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 10 Cal.Rptr.2d 183, 832 P.2d 899 ( Moncharsh ), this court reviewed the history of the California Arbitration Act (CAA; Code Civ. Proc., § 1280 et seq.). ¹ We concluded that the California Legislature “adopt[ed] the position taken in case law ... that is, ‘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.’ ” ( Moncharsh, at p. 25, 10 Cal.Rptr.2d 183, 832 P.2d 899, quoting Crofoot v. Blair Holdings Corp. (1953) 119 Cal.App.2d 156, 186, 260 P.2d 156 ( Crofoot ).)

We adhere to our holding in Moncharsh, recognizing that contractual limitations may alter the usual scope of review. 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.” (§§ 1286.2, subd. (a)(4), 1286.6, subd. (b).) Here, 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.” This contract provision is enforceable under state law, and we reverse the contrary ruling of the Court of Appeal.

[1] Regarding the classwide arbitration issue, we remand for redetermination by the arbitrators. The contract directs the arbitrators to apply California substantive law, but specifies that the arbitration proceedings are to be governed by federal law and the rules of the American Arbitration Association (AAA). ² The arbitration panel, in a split decision, decided that classwide arbitration is a substantive right under California case law, and that AAA rules allow classwide arbitration unless the arbitration clause forbids it. We conclude that the majority arbitrators misapplied both California law and AAA rules, and that it is proper to return the matter to them for reconsideration under the proper legal standards.

I. BACKGROUND

Defendant DIRECTV, Inc., broadcasts television programming nationwide, via satellite. It contracts with retail dealers to provide customers with equipment needed to receive its satellite signal. In 1996, DIRECTV employed a “residential dealer agreement” for this purpose. A new “sales agency agreement” was used in 1998. Both agreements included arbitration clauses; neither mentioned classwide arbitration.

In 2001, dealers from four states filed suit in Oklahoma, asserting on behalf of a nationwide class that DIRECTV had wrongfully withheld commissions and assessed improper charges. DIRECTV moved to compel arbitration. As the Oklahoma court was considering whether the arbitration could be conducted on a classwide basis, the United States Supreme Court decided Green Tree Financial Corp. v. Bazzle (2003) 539 U.S. 444, 123 S.Ct. 2402, 156 L.Ed.2d 414 ( Bazzle ). A plurality in Bazzle held that the arbitrator must decide whether class arbitration is authorized by the parties' contract. ( Id. at pp. 451-452, 123 S.Ct. 2402 (plur. opn. of Breyer, J.); see Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 169-171, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) Accordingly, the Oklahoma court directed the parties to submit the matter to arbitration in Los Angeles as provided in the sales agency agreement. ³ After the dealers presented a statement of claim and demand for class arbitration in March 2004, a panel of three AAA arbitrators was selected. Following the procedure adopted by the AAA in response to Bazzle, the panel first addressed whether the parties' agreement permitted the arbitration to proceed on a classwide basis.

After briefing and argument, a majority of the panel decided that even though “the contract is silent and manifests no intent on this issue,” arbitration on a classwide basis was authorized under Blue Cross of California v. Superior Court (1998) 67 Cal.App.4th 42, 78 Cal.Rptr.2d 779 ( Blue Cross ), and Keating v. Superior Court (1982) 31 Cal.3d 584, 183 Cal.Rptr. 360, 645 P.2d 1192 ( Keating; overruled on other grounds in Southland Corp. v. Keating (1984) 465 U.S. 1, 11, 104 S.Ct. 852, 79 L.Ed.2d 1). The majority deemed the question one of substantive California law, though it also relied on AAA rules and policy governing class arbitration. The award emphasized that class arbitration was not necessarily required in this case; it was merely permitted by the contract. Whether the arbitration would actually be maintained on a classwide basis would be the subject of a future hearing.

The dissenting arbitrator found that the sales agency agreement provided “ample indication” the parties had contemplated arbitration only on an individual basis. He reasoned that Blue Cross and Keating did not apply because they addressed the discretion of a court to permit classwide arbitration, based not on contractual intent but on policy considerations reflected in the CAA. Under Bazzle, on the other hand, this determination is for arbitrators to make based on the terms of the contract. The dissent considered the availability of classwide arbitration to be a procedural issue subject to the FAA and AAA rules, under the terms of the arbitration clause.

DIRECTV petitioned to vacate the award, contending (1) the majority had exceeded its authority by substituting its discretion for the parties' intent regarding class arbitration; (2) the majority had improperly ignored extrinsic evidence of contractual intent; and (3) even if the majority had not exceeded the authority generally granted to arbitrators, the award reflected errors of law that the arbitration clause placed beyond their powers and made subject to judicial review. The dealers responded that the majority had properly applied California law and had not refused to receive extrinsic evidence. The trial court vacated the award, essentially accepting all of DIRECTV's arguments.

The Court of Appeal reversed, holding that the trial court exceeded its jurisdiction by reviewing the merits of the arbitrators' decision. Although in the trial court the dealers did not question whether a contract may provide for an expanded scope of judicial review, the Court of Appeal deemed it an important matter of public policy, suitable for consideration for the first time on appeal. The court agreed with two previous Court of Appeal decisions holding such provisions unenforceable. ( Oakland-Alameda County Coliseum Authority v. CC Partners (2002) 101 Cal.App.4th 635, 645, 124 Cal.Rptr.2d 363; Crowell v. Downey Community Hospital Foundation (2002) 95 Cal.App.4th 730, 735-737, 115 Cal.Rptr.2d 810 ( Crowell ).) It concluded that the provision for judicial review in this case was severable from the remainder of the arbitration agreement, and directed the trial court to confirm the award.

We granted DIRECTV's petition for review.

II. DISCUSSION

A. Contract Provisions for Judicial Review of Arbitration Awards

1. The CAA, the FAA, and Prior Case Law

“In most important respects, the California statutory scheme on enforcement of private arbitration agreements is similar to the [FAA]; the similarity is not surprising, as the two share origins in the earlier statutes of New York and New Jersey. (See Recommendation and Study Relating to Arbitration (Dec.1960) 3 Cal. Law Revision Com. Rep. (1961) p. G-28 ...; Feldman, Arbitration Law in California: Private Tribunals for Private Government (1957) 30 So.Cal.L.Rev. 375, 388, fn. 45.)” ( Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 406, 58 Cal.Rptr.2d 875, 926 P.2d 1061 ( Rosenthal ).) The CAA, like the FAA, provides that arbitration agreements are “valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.” (§ 1281; see 9 U.S.C. § 2.) This provision was intended “to overcome an anachronistic judicial hostility to agreements to arbitrate, which American courts had borrowed from English common law.” ( Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 626, fn. 14, 105 S.Ct. 3346, 87 L.Ed.2d 444; see also, e.g., Shearson/American Express Inc. v. McMahon (1987) 482 U.S. 220, 226, 107 S.Ct. 2332, 96 L.Ed.2d 185; Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 97-98, 99 Cal.Rptr.2d...