Supreme Court of California Justia
Citation 44 Cal. 4th 1334, 190 P.3d 586, 82 Cal. Rptr. 3d 229

Cable Connection, Inc. v. DIRECTV, Inc.

Filed 8/25/08



IN THE SUPREME COURT OF CALIFORNIA






CABLE CONNECTION, INC., et al.,

Plaintiffs

and

Appellants,

S147767

v.

Ct.App. 2/4 B188278

DIRECTV, INC.,

Los Angeles County

Defendant and Respondent.

Super. Ct. No. BS095987



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) __ U.S. __ [128 S.Ct. 1396, 1404-1405] (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. __ [128 S.Ct. at p. 1406].) In Moncharsh v.

Heily & Blase (1992) 3 Cal.4th 1 (Moncharsh), this court reviewed the history of

the California Arbitration Act (CAA; Code Civ. Proc., § 1280 et seq.).1 We

1

Further statutory references are to the Code of Civil Procedure unless

otherwise indicated.

1


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, quoting

Crofoot v. Blair Holdings Corp. (1953) 119 Cal.App.2d 156, 186 (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.

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.

2

The contract allows enforcement proceedings to be brought in either state

or federal court. Because the parties proceeded in state court under the CAA, we
conclude that judicial review of the award is governed by state law, though the
arbitration proceedings are governed by federal procedural law and AAA rules
under the terms of the contract. (See fn. 12, post.)

2

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 (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 (plur. opn. of Breyer, J.); see Discover Bank v.

Superior Court (2005) 36 Cal.4th 148, 169-171.) Accordingly, the Oklahoma

court directed the parties to submit the matter to arbitration in Los Angeles as

provided in the sales agency agreement.3




3 The sales agency agreement, unlike the earlier residential dealer

agreement, specified that claims of $250,000 or more would be heard by three
arbitrators. The arbitrators, the trial court, and the Court of Appeal applied the
arbitration clause in the sales agency agreement. The parties do not question the
use of that clause.


Section 18.12 of the sales agency agreement, captioned “ARBITRATION,”

states:


“(a) Any dispute or claim arising out of the interpretation, performance, or

breach of this Agreement, including without limitation claims alleging fraud in the
inducement, shall be resolved only by binding arbitration, at the request of either
party, in accordance with the rules of the American Arbitration Association,
modified as herein provided. The arbitrators shall be, to the fullest extent
available, either retired judges or selected from a panel of persons trained and
expert in the subject area of the asserted claims. If the claim seeks damages of
less than $250,000, it shall be decided by one arbitrator. In all other cases, each

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 (Blue Cross), and Keating v. Superior Court (1982) 31


party shall select one arbitrator, who shall jointly select the third arbitrator. If for
any reason a third arbitrator is not selected within one month after the claim is first
made, the third arbitrator shall be selected in accordance with the rules of the
American Arbitration Association. The arbitrators shall apply California
substantive law to the proceeding, except to the extent Federal substantive law
would apply to any claim. The arbitration shall be conducted in Los Angeles,
California. An award may be entered against a party who fails to appear at a duly
noticed hearing. 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. The decision of the arbitrators may be
entered and enforced as a final judgment in any court of competent jurisdiction.
The parties shall share equally the arbitrator’s fees and other costs of the
arbitration.


“(b) Notwithstanding the foregoing, the following shall not be subject to

arbitration and may be adjudicated only by the Los Angeles County, California
Superior Court or the U.S. District Court for the Central District of California:


“(1) any dispute, controversy, or claim relating to or contesting the validity

of DIRECTV’s right to offer DBS Service to the public or any of DIRECTV’s
Trade Secrets or Marks; and


“(2) the request by either party for preliminary or permanent injunctive

relief, whether prohibitive or mandatory, or provisional relief such as writs of
attachment or possession.


“(c) This Section and any arbitration conducted hereunder shall be

governed by the United States Arbitration Act (9 U.S.C. Section 1, et seq.). The
parties acknowledge that the transactions contemplated by this Agreement involve
commerce, as defined in said Act. This Section 18.12 shall survive the
termination or expiration of this Agreement.”

4

Cal.3d 584 (Keating; overruled on other grounds in Southland Corp. v. Keating

(1984) 465 U.S. 1, 11). 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

5

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; Crowell v. Downey Community Hospital

Foundation (2002) 95 Cal.App.4th 730, 735-737 (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 (Arbitration Study);

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 (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; see also, e.g., Shearson/American

Express Inc. v. McMahon (1987) 482 U.S. 220, 226; Armendariz v. Foundation

Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 97-98; Broughton v. Cigna

Healthplans (1999) 21 Cal.4th 1066, 1073-1074.)

6



Consistent with that purpose, the CAA and the FAA provide only limited

grounds for judicial review of an arbitration award. Under both statutes, courts are

authorized to vacate an award if it was (1) procured by corruption, fraud, or undue

means; (2) issued by corrupt arbitrators; (3) affected by prejudicial misconduct on

the part of the arbitrators; or (4) in excess of the arbitrators’ powers. (§ 1286.2,

subd. (a);4 9 U.S.C. § 10(a).5) An award may be corrected for (1) evident




4 “[T]he court shall vacate the award if the court determines any of the

following:


“(1) The award was procured by corruption, fraud or other undue means.

“(2) There was corruption in any of the arbitrators.

“(3) The rights of the party were substantially prejudiced by misconduct of

a neutral arbitrator.


“(4) The arbitrators exceeded their powers and the award cannot be

corrected without affecting the merits of the decision upon the controversy
submitted.


“(5) The rights of the party were substantially prejudiced by the refusal of

the arbitrators to postpone the hearing upon sufficient cause being shown therefor
or by the refusal of the arbitrators to hear evidence material to the controversy or
by other conduct of the arbitrators contrary to the provisions of this title.


“(6) An arbitrator making the award either: (A) failed to disclose within the

time required for disclosure a ground for disqualification of which the arbitrator
was then aware; or (B) was subject to disqualification upon grounds specified in
Section 1281.91 but failed upon receipt of timely demand to disqualify himself or
herself as required by that provision. However, this subdivision does not apply to
arbitration proceedings conducted under a collective bargaining agreement
between employers and employees or between their respective representatives.”
(§ 1286.2, subd. (a).)

5 “In any of the following cases the United States court in and for the

district wherein the award was made may make an order vacating the award upon
the application of any party to the arbitration —


“(1) where the award was procured by corruption, fraud, or undue means;

“(2) where there was evident partiality or corruption in the arbitrators, or

either of them;


“(3) where the arbitrators were guilty of misconduct in refusing to postpone

the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent
and material to the controversy; or of any other misbehavior by which the rights of
any party have been prejudiced; or

7

miscalculation or mistake; (2) excess of the arbitrators’ powers; or (3)

imperfection in form. (§ 1286.6;6 9 U.S.C. § 11.7)

As noted at the outset, and discussed further below, in Moncharsh we

declared 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.’ (Crofoot, supra, 119 Cal.App.2d at

p. 186.)” (Moncharsh, supra, 3 Cal.4th at p. 25.) In the years following the

Moncharsh decision, our Courts of Appeal have rejected claims that review of the

merits was authorized inferentially, by contract clauses stating that “ ‘the award

will be in the form of a statement of decision’ ” (Pacific Gas & Electric Co. v.

Superior Court (1993) 15 Cal.App.4th 576, 585), or that California law “ ‘shall

govern [the] interpretation and effect’ ” of the contract (Marsch v. Williams (1994)




“(4) where the arbitrators exceeded their powers, or so imperfectly executed

them that a mutual, final, and definite award upon the subject matter submitted
was not made.” (9 U.S.C. § 10(a).)


6 “[T]he court, unless it vacates the award pursuant to Section 1286.2, shall

correct the award and confirm it as corrected if the court determines that:


“(a) There was an evident miscalculation of figures or an evident mistake in

the description of any person, thing or property referred to in the award;


“(b) The arbitrators exceeded their powers but the award may be corrected

without affecting the merits of the decision upon the controversy submitted; or


“(c) The award is imperfect in a matter of form, not affecting the merits of

the controversy.” (§ 1286.6.)


7 “In either of the following cases the United States court in and for the

district wherein the award was made may make an order modifying or correcting
the award upon the application of any party to the arbitration —


“(a) Where there was an evident material miscalculation of figures or an

evident material mistake in the description of any person, thing, or property
referred to in the award.


“(b) Where the arbitrators have awarded upon a matter not submitted to

them, unless it is a matter not affecting the merits of the decision upon the matter
submitted.


“(c) Where the award is imperfect in matter of form not affecting the merits

of the controversy.


“The order may modify and correct the award, so as to effect the intent

thereof and promote justice between the parties.” (9 U.S.C. § 11.)

8

23 Cal.App.4th 238, 245), or that the arbitrator “ ‘shall apply California law’ ” and

“ ‘shall be constrained by the rule of law’ ” (Baize v. Eastridge Companies, LLC

(2006) 142 Cal.App.4th 293, 297 (Baize)). In each of these cases, however, the

courts noted that an expanded scope of review would be available under a clause

specifically tailored for that purpose. (Baize, at p. 301; Marsch, at pp. 244-245;

Pacific Gas & Electric Co., at p. 588.)

Nevertheless, when the issue has been squarely presented, no Court of

Appeal has enforced a contract clause calling for judicial review of an arbitration

award on its merits.8 In Old Republic Ins. Co. v. St. Paul Fire & Marine Ins. Co.

(1996) 45 Cal.App.4th 631 (Old Republic), a stipulation for binding arbitration

provided that a special master would enter findings of fact and conclusions of law,

which would be reviewed by the trial court under the CAA, entered as a judgment,

and “ ‘treated as a judgment of the Superior Court for all purposes, including,

without limitation, the right of any party adversely affected by said judgment to

seek review of the findings of fact, conclusions of law, or judgment as if this

matter had been tried to the Court without a jury and judgment entered thereon.’ ”

(Id. at pp. 634-635.) The Court of Appeal refused to review the merits, because

the stipulation was “inconsistent with some of the primary purposes of arbitration,

quicker results and early finality.” (Id. at p. 638.) Moreover, “the flexibility in the

consideration of both evidence and law afforded to arbitrators” made plenary

review on appeal problematic. (Ibid.) The court also held that the limitations on

the scope of the trial court’s review precluded more extensive appellate review,

8

Two divided Courts of Appeal have treated arbitration proceedings as

other forms of alternative dispute resolution, so as to permit review of the merits.
In National Union Fire Ins. Co. v. Nationwide Ins. Co. (1999) 69 Cal.App.4th 709,
715 (National Union), a stipulation for arbitration was deemed “a reference by
consent of the parties” under section 638. In City of Shasta Lake v. County of
Shasta
(1999) 75 Cal.App.4th 1, 10-13, the court construed an agreement for
binding arbitration before a retired judge as a stipulation for trial before a
temporary judge under article VI, section 21 of the California Constitution.

9

and that the parties could not create appellate jurisdiction by consent. (Id. at pp.

638-639.)

In

Crowell, supra, 95 Cal.App.4th 730, the parties’ contract included an

arbitration clause requiring the arbitrator to make written findings and conclusions

“ ‘supported by law and substantial evidence.’ ” (Id. at p. 733, fn. 2.) The award

was to be “ ‘final, binding and enforceable . . . , except that upon the petition of

any party to the arbitration, a court shall have the authority to review the transcript

of the arbitration proceedings and the arbitrator’s award and shall have the

authority to vacate the arbitrator’s award, in whole or in part, on the basis that the

award is not supported by substantial evidence or is based upon an error of law.’ ”

(Ibid.)

The

Crowell court, in a split decision, decided the statutory bases for

vacating and correcting arbitration awards are exclusive, and permitting the parties

to expand those grounds by agreement would undermine the purpose of reducing

expense and delay. (Crowell, supra, 95 Cal.App.4th at p. 735.) Noting that

section 1296 authorizes review of the merits following a public contract

arbitration, the majority reasoned that the absence of such a provision for other

forms of arbitration “suggests the legislative intent that parties cannot agree to a

review on the merits.” (Crowell, at pp. 737-738.) “Because the Legislature

clearly set forth the trial court’s jurisdiction to review arbitration awards when it

specified grounds for vacating or correcting awards in sections 1286.2 and 1286.6,

we hold that the parties cannot expand that jurisdiction by contract to include a

review on the merits.” (Crowell, at p. 739.) The majority deemed the provision

for judicial review “so central to the arbitration agreement that it could not be

severed,” and thus held the entire agreement unenforceable. (Id. at pp. 739-740.)

A lengthy dissent in Crowell argued that the arbitration statutes do not

prohibit judicial review of the merits. The dissenting justice saw section 1296 as a

demonstration of the courts’ suitability to provide substantive review of

arbitration awards, and noted that Moncharsh only bars such review in the absence

10

of a limiting clause in the arbitration agreement. (Crowell, supra, 95 Cal.App.4th

at pp. 743-745 (dis. opn. of Nott, J.).) The dissent took the position that courts

have fundamental jurisdiction to review arbitration awards, and parties may

consent to a scope of review broader than that provided by the CAA. It also

contended that the policies favoring arbitration would be best served by honoring

the parties’ freedom to contract for the resolution of disputes under rules of their

own choosing. The most costly and time-consuming aspects of litigation could be

handled by an arbitrator, with the courts merely providing an oversight function.

Parties who fear that the benefits of speed and reduced expense may be obtained at

the expense of a capricious arbitration award would be encouraged to select

arbitration, with the assurance provided by judicial review. (Id. at pp. 748-753.)

Here, the dissent said, the majority had “throw[n] ‘the baby out with the bath

water’ ” by forcing parties who had agreed to arbitration to go through “full court

litigation.” (Id. at p. 753.)

The

Crowell dissent has found support in dicta. One Court of Appeal has

deemed it “strong,” and criticized the majority opinion as inconsistent with

Moncharsh. (Baize, supra, 142 Cal.App.4th at p. 301, fn. 5.) However, the views

of the Crowell majority were followed in Oakland-Alameda County Coliseum

Authority v. CC Partners, supra, 101 Cal.App.4th 635. There the arbitration

agreement included the following provision: “ ‘either party may file an

application to correct or vacate the arbitration award or an application for de novo

review on all questions of law based on the arbitrator’s finding[s] of fact (which

are deemed for such purpose to be stipulated by the parties), in either case under

California Code of Civil Procedure Section 1285 et seq. . . .’ ” (CC Partners, at p.

645, fn. 3.) The Court of Appeal agreed with the “primary holding in Crowell,”

that the scope of review could not be expanded by contract. (Id. at p. 645.) But

rather than invalidating the entire arbitration agreement, the court severed the

provision for judicial review and affirmed the judgment confirming the award.

11

Unlike the agreement in Crowell, the CC Partners contract included a severance

clause. (CC Partners, at pp. 646-647.)

Before

the

Hall Street decision was handed down, the federal circuits were

split on whether the FAA grounds for judicial review are exclusive. The First,

Third, Fourth, Fifth, and Sixth Circuits held or indicated that contract provisions

for expanded review of arbitration awards were enforceable.9 The Seventh,

Eighth, Ninth, and Tenth Circuits took the opposite view.10 As we discuss next, a

majority of the Supreme Court in Hall Street decided the FAA was intended to

provide exclusive criteria for review of arbitration awards.

2. Hall Street and the Question of Preemption

The

Hall Street case arose from an arbitration agreement negotiated during

litigation, to resolve an indemnification claim. The agreement was approved and

entered as an order by the trial court. It provided: “ ‘The Court shall vacate,

modify or correct any award: (i) where the arbitrator’s findings of facts are not

supported by substantial evidence, or (ii) where the arbitrator’s conclusions of law




9 Puerto Rico Telephone Co., Inc. v. U.S. Phone Mfg. Corp. (1st Cir. 2005)
427 F.3d 21, 30-31 (dicta; see also New England Utilities v. Hydro-Quebec
(D.Mass. 1998) 10 F.Supp.2d 53, 62-64); Roadway Package System, Inc. v.
Kayser
(3d Cir. 2001) 257 F.3d 287, 293 (dicta); Syncor Intern. Corp. v.
McLeland
(4th Cir. Aug. 11, 1997, No. 96-2261) 1997 WL 452245; Gateway
Technologies, Inc. v. MCI Telecommunications Corp.
(5th Cir. 1995) 64 F.3d 993,
996-997; Jacada (Europe), Ltd. v. International Marketing Strategies, Inc. (6th
Cir. 2005) 401 F.3d 701, 710-712 (dicta). See also LaPine Technology Corp. v.
Kyocera Corp.
(9th Cir. 1997) 130 F.3d 884, 888 (LaPine), overruled by Kyocera
Corp. v. Prudential-Bache Trade Services, Inc.
(9th Cir. 2003) 341 F.3d 987, 1000
(Kyocera).


A district court from the Southern District of New York enforced a

provision for expanded review (Fils et Cables d’Acier de Lens v. Midland Metals
Corp.
(S.D.N.Y. 1984) 584 F.Supp. 240, 244); the Second Circuit did not weigh in
on the question.


10 Chicago Typographical Union No. 16 v. Chicago Sun-Times, Inc. (7th

Cir. 1991) 935 F.2d 1501, 1505 (dicta); UHC Management Co., Inc. v. Computer
Sciences Corp.
(8th Cir. 1998) 148 F.3d 992, 997-998 (dicta); Kyocera, supra, 341
F.3d at page 1000; Bowen v. Amoco Pipeline Co. (10th Cir. 2001) 254 F.3d 925,
935-937.

12

are erroneous.’ ” (Hall Street, supra, __ U.S. at p. __ [128 S.Ct. at pp. 1400-

1401].) The trial court vacated the arbitrator’s award and remanded for further

consideration; at the time, the Ninth Circuit approved of contract provisions for

expanded judicial review. (Hall Street, at p. __ [128 S.Ct. at p.1401]; see LaPine,

supra, 130 F.3d at p. 888.) After the arbitrator ruled a second time, both parties

sought modification, and both appealed from the trial court’s judgment modifying

the award. By that time, the Ninth Circuit had changed its view on the

enforceability of judicial review provisions. (See Kyocera, supra, 341 F.3d at p.

1000.) It reversed the judgment. (Hall Street, at p. __ [128 S.Ct.at p. 1401].)

After another ruling by the trial court modifying the award, and another

reversal by the Ninth Circuit, the Supreme Court granted certiorari. A majority of

the court agreed with the Ninth Circuit that the grounds for vacatur and

modification provided by sections 10 and 11 of the FAA are exclusive. (Hall

Street, supra, __ U.S. at p. __ [128 S.Ct. at p. 1401].) First, the majority rejected

the argument that the nonstatutory “manifest disregard of the law” standard of

review recognized by some federal courts supports the enforceability of contract

provisions for additional grounds to vacate or modify an arbitration award. (Id. at

p. __ [128 S.Ct. at p. 1403].) It reasoned that the “manifest disregard” exception

presumes a rule against general review for legal error, and should not be seen as a

“camel’s nose” under the arbitration tent. (Id. at p. __ [128 S.Ct. at pp. 1403-

1404]; on “manifest disregard,” see, e.g., McCarthy v. Citigroup Global Markets

Inc. (1st Cir. 2006) 463 F.3d 87, 91-92.)

Next, the Hall Street majority disposed of the contention that allowing

parties to contract for an expanded scope of review is consistent with the FAA’s

primary goal of ensuring the enforcement of arbitration agreements. “[T]o rest

this case on the general policy of treating arbitration agreements as enforceable as

such would be to beg the question, which is whether the FAA has textual features

at odds with enforcing a contract to expand judicial review following the

arbitration.” (Hall Street, supra, __ U.S. at p. __ [128 S.Ct. at p. 1404].) The

13

majority decided that, indeed, those textual features exist. It characterized the

statutory grounds for review as remedies for “egregious departures from the

parties’ agreed-upon arbitration,” such as corruption and fraud. (Ibid.) It viewed

the directive in section 9 of the FAA, that the court “must grant” confirmation

“unless the award is vacated, modified, or corrected as prescribed in sections 10

and 11,” as a mandatory provision leaving no room for the parties to agree

otherwise. (Hall Street, at p. __ [128 S.Ct. at p. 1405].)

“Instead of fighting the text, it makes more sense to see the three

provisions, §§ 9-11, as substantiating a national policy favoring arbitration with

just the limited review needed to maintain arbitration’s essential virtue of

resolving disputes straightaway. Any other reading opens the door to the full-bore

legal and evidentiary appeals that can ‘rende[r] informal arbitration merely a

prelude to a more cumbersome and time-consuming judicial review process,’

Kyocera, [supra,] 341 F.3d, at 998; cf. Ethyl Corp. v. United Steelworkers of

America, 768 F.2d 180, 184 (C.A.7 1985), and bring arbitration theory to grief in

post-arbitration process.” (Hall Street, supra, __ U.S. at p. __ [128 S.Ct. at p.

1405].)

Despite this strict reading of the FAA, the Hall Street majority left the door

ajar for alternate routes to an expanded scope of review. “In holding that §§ 10

and 11 provide exclusive regimes for the review provided by the statute, we do not

purport to say that they exclude more searching review based on authority outside

the statute as well. The FAA is not the only way into court for parties wanting

review of arbitration awards: they may contemplate enforcement under state

statutory or common law, for example, where judicial review of different scope is

arguable. But here we speak only to the scope of the expeditious judicial review

under §§ 9, 10, and 11, deciding nothing about other possible avenues for judicial

enforcement of arbitration awards.” (Hall Street, supra, __ U.S. at p. __ [128

S.Ct. at p. 1406].)

14

Furthermore,

the Hall Street majority recognized that the trial court’s case

management authority under rule 16 of the Federal Rules of Civil Procedure might

support its order adopting the parties’ agreement to review of the merits.

However, it remanded for further proceedings on this point, concluding that it was

“in no position to address the question now, beyond noting the claim of relevant

case management authority independent of the FAA.” (Hall Street, supra, __ U.S.

at p. __ [128 S.Ct. at p. 1407].)

In dissent, Justice Stevens, joined by Justice Kennedy, took issue with the

majority’s view of the policy served by the FAA. He argued that “in light of the

historical context and the broader purpose of the FAA, §§ 10 and 11 are best

understood as a shield meant to protect parties from hostile courts, not a sword

with which to cut down parties’ ‘valid, irrevocable and enforceable’ agreements to

arbitrate their disputes subject to judicial review for errors of law.[11] § 2.” (Hall

Street, supra, __ U.S. at p. __ [128 S.Ct. at p. 1409] (dis. opn. of Stevens, J.).)

Justice Stevens agreed that “there may be additional avenues available for judicial

enforcement of parties’ fairly negotiated review provisions” (id. at p. __ [128 S.Ct.

at p. 1410]), but he would have resolved the conflict among the federal circuits in

favor of the parties’ freedom to supplement by contract the statutory grounds for

vacatur and modification, “an agreement that does not even arguably offend any

public policy whatsoever” (id. at p. __ [128 S.Ct. at p. 1409]).

Justice Breyer also dissented. He too agreed with the majority that the

FAA “ ‘is not the only way into court for parties wanting review of arbitration

awards.’ ” (Hall Street, supra, __ U.S. at p. __ [128 S.Ct. at p. 1410] (dis. opn. of

11

“In the years before the passage of the FAA, arbitration awards were

subject to thorough and broad judicial review. See Cohen & Dayton, The New
Federal Arbitration Law, 12 Va. L.Rev. 265, 270-271 (1926); Cullinan,
Contracting for an Expanded Scope of Judicial Review in Arbitration Agreements,
51 Vand. L.Rev. 395, 409 (1998). In §§ 10 and 11 of the FAA, Congress
significantly limited the grounds for judicial vacatur or modification of such
awards in order to protect arbitration awards from hostile and meddlesome
courts.”

15

Breyer, J.), quoting maj. opn. at p. 1406.) Justice Breyer, however, would have

remanded with instructions to affirm the trial court’s judgment, apparently on the

basis that the FAA had no effect on the court’s independent authority to approve

the parties’ agreement as a matter of case management. (Id. at p. __ [128 S.Ct. at

p. 1410].)

The dealers in this case urge us to follow the rationale of the Hall Street

majority. They contend that any other construction of the CAA would result in its

preemption by the FAA. Alternatively, they argue that Hall Street provides a

persuasive analysis of the FAA that should be applied to the similar CAA

provisions governing judicial review. We consider first the question of

preemption, because if the dealers are correct on that point, it would be fruitless to

consider alternate interpretations of state law.12

12

At our invitation, the dealers also briefed the question whether the

proceedings for judicial review of the arbitration award in this case are governed
by the FAA, given the contract specification that “any arbitration conducted
hereunder shall be governed by the United States Arbitration Act.” The dealers
contend this clause requires application of the FAA grounds for review, as strictly
limited by Hall Street. DIRECTV responds that the FAA provisions governing
judicial review are specific to federal courts; that the dealers waived their FAA
theory by failing to raise it in the trial court or on appeal; and that the contract
calls only for the arbitration itself to be governed by the federal statute, not
postarbitration proceedings in court.


We conclude that 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(a).) The parties’ contract did not
specify whether enforcement proceedings were to be brought in state or federal
court, providing generally that “[t]he decision of the arbitrators may be entered
and enforced as a final judgment in any court of competent jurisdiction.”
DIRECTV’s petition to vacate the award was filed, argued, and appealed in state
court, and before the Hall Street decision both parties proceeded on the theory that
the CAA was controlling. “The rule is well settled that the theory upon which a
case is tried must be adhered to on appeal. A party is not permitted to change his
position and adopt a new and different theory on appeal. To permit him to do so
would not only be unfair to the trial court, but manifestly unjust to the opposing
litigant.” (Ernst v. Searle (1933) 218 Cal. 233, 240-241; see also JRS Products,

16



Section 2 of the FAA, declaring the enforceability of arbitration

agreements, “create[s] a body of federal substantive law of arbitrability, applicable

to any arbitration agreement within the coverage of the Act.” (Moses H. Cone

Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24.) The FAA governs

agreements in contracts involving interstate commerce, like those in this case.

(Southland Corp. v. Keating, supra, 465 U.S. at pp. 10-11; Cronus Investments,

Inc. v. Concierge Services (2005) 35 Cal.4th 376, 383-384 (Cronus).) 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. (E.g., Doctor’s Associates, Inc. v. Casarotto (1996) 517 U.S. 681,

686-688; Allied-Bruce Terminix Companies, Inc. v. Dobson (1995) 513 U.S. 265,

272-273; Perry v. Thomas (1987) 482 U.S. 483, 490-491; Southland Corp. v.

Keating, supra, 465 U.S. at p. 16; see Cronus, at p. 385.)

However, “the United States Supreme Court does not read the FAA’s

procedural provisions to apply to state court proceedings.” (Cronus, supra, 35

Cal.4th at p. 389.) Sections 3 and 4 of the FAA, governing stays of litigation and

petitions to enforce arbitration agreements, do not apply in state court. (Volt Info.

Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 477, fn. 6 (Volt);

Southland Corp. v. Keating, supra, 465 U.S. at p. 16, fn. 10; Cronus, at pp. 389-

390; Rosenthal, supra, 14 Cal.4th at pp. 407-408.) 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 where the

award was made.” (Fn. 12, ante.) We have held that similar language in sections


Inc. v. Matsushita Elec. Corp. of America (2004) 115 Cal.App.4th 168, 178; 9
Witkin, Cal. Procedure (4th ed. 1997) Appeal, § 404, p. 455.)

17

3 and 4 of the FAA reflects Congress’s intent to limit the application of those

provisions to federal courts. (Cronus, at pp. 388-389.)

In several cases, California Courts of Appeal have rejected claims that the

FAA grounds for reviewing arbitration awards preempt their CAA counterparts.

(SWAB Financial v. E*Trade Securities (2007) 150 Cal.App.4th 1181, 1195; Ovitz

v. Schulman (2005) 133 Cal.App.4th 830, 851; Siegel v. Prudential Ins. Co. of

America (1998) 67 Cal.App.4th 1270, 1290; see also Muao v. Grosvenor

Properties (2002) 99 Cal.App.4th 1085, 1091-1092 [FAA does not displace CAA

provisions governing appealable orders].)13 The Siegel court, after reviewing the

legislative history of the FAA, noted that “[n]othing in the legislative reports and

debates evidences a congressional intention that postaward and state court

litigation rules be preempted so long as the basic policy upholding the

enforceability of arbitration agreements remained in full force and effect.”

(Siegel, at p. 1289.)

Thus, 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. (Cronus,

supra, 35 Cal.4th at pp. 390-391; Rosenthal, supra, 14 Cal.4th at pp. 408-410.)

Before

Hall Street, we would have had no difficulty concluding that

enforcing agreements for judicial review on the merits is consistent with the

fundamental purpose of the FAA. The high court has made it clear that the FAA

13

Other courts have reached similar conclusions. See Trombetta v.

Raymond James Financial Services, Inc. (Pa.Super.Ct. 2006) 907 A.2d 550, 568;
DeBaker v. Shah
(Wis.Ct.App. 1994) 522 N.W.2d 268, 271, reversed on other
grounds by DeBaker v. Shah (Wis. 1995) 533 N.W.2d 464; Flexible Mfg. Systems
Pty Ltd. v. Super Products Corp.
(E.D.Wis. 1994) 874 F.Supp. 247, 249.
Compare M & L Power Services, Inc. v. American Networks Intern. (D.R.I. 1999)
44 F.Supp.2d 134, 139-142, holding that a “complete irrationality” standard
articulated by the Rhode Island Supreme Court violated the policy established by
section 2 of the FAA, and was therefore preempted in cases involving interstate
commerce.

18

does not “prevent[] the enforcement of agreements to arbitrate under different

rules than those set forth in the Act itself. Indeed, such a result would be quite

inimical to the FAA’s primary purpose of ensuring that private agreements to

arbitrate are enforced according to their terms. Arbitration under the Act is a

matter of consent, not coercion, and parties are generally free to structure their

arbitration agreements as they see fit. Just as they may limit by contract the issues

which they will arbitrate [citation], so too may they specify by contract the rules

under which that arbitration will be conducted. Where . . . the parties have agreed

to abide by state rules of arbitration, enforcing those rules according to the terms

of the agreement is fully consistent with the goals of the FAA . . . . By permitting

the courts to ‘rigorously enforce’ such agreements according to their terms

[citation], we give effect to the contractual rights and expectations of the parties,

without doing violence to the policies behind by the FAA.” (Volt, supra, 489 U.S.

at p. 479.)

The court has repeatedly ruled that the terms of the parties’ agreement are

controlling 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 [citation], but to ensure that

commercial arbitration agreements, like other contracts, ‘ “are enforced according

to their terms,” ’ [citations], and according to the intentions of the parties

[citations].” (First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, 947;

see also Volt, supra, 489 U.S. at p. 479; Dean Witter Reynolds Inc. v. Byrd (1985)
470 U.S. 213, 220-221.) The court has viewed the federal policy served by the

FAA as “at bottom a policy guaranteeing the enforcement of private contractual

arrangements.” (Mitsubishi Motors v. Soler Chrysler-Plymouth, supra, 473 U.S.

at p. 625; see also, e.g., Mastrobuono v. Shearson Lehman Hutton, Inc. (1995) 514

U.S. 52, 58.)

The

Hall Street majority, however, brushed aside policy considerations

favoring the enforcement of contractual arbitration arrangements, concentrating

19

instead on whether “the FAA has textual features at odds with enforcing a contract

to expand judicial review following the arbitration.” (Hall Street, supra, __ U.S.

at p. __ [128 S.Ct. at p. 1404].) Underlying the FAA provisions governing judicial

review, it discerned “a national policy favoring arbitration with just the limited

review needed to maintain arbitration’s essential virtue of resolving disputes

straightaway.” (Id. at p. __ [128 S.Ct. at p. 1405].)

Nevertheless, we do not believe the Hall Street majority intended to declare

a policy with preemptive effect in all cases involving interstate commerce.14 Hall

Street was a federal case governed by federal law; the court considered no

question of competing state law. It reviewed the application of FAA provisions

for judicial review that speak only to the federal courts. The court unanimously

left open other avenues for judicial review, including those provided by state

statutory or common law. (Hall Street, supra, __ U.S. at p. __, and p. __ [128

S.Ct. at p. 1406, and p. 1410] (dis. opns. of Stevens, J., and Breyer, J.).) While the

court, of course, decided nothing about the viability of these alternatives, their

14

Such an effect would be sweeping indeed in the commercial setting. Not

only would state courts be barred from giving a more expansive interpretation to
state law as it applies to agreements for merits review of arbitration awards, but
state legislatures would be unable to specifically permit contract provisions for
expanded review. (See, e.g., N.J.Stat.Ann. § 2A:23B-4(c) [“nothing in this act
shall preclude the parties from expanding the scope of judicial review of an award
by expressly providing for such expansion”].) Arguably, statutory provisions for
review of the merits in particular contexts, such as public contract arbitrations (see
§ 1296), would be precluded. The viability of public policy exceptions to the
general rule of limited review would also be called into question. For example,
when unwaivable statutory rights are at stake, this court has repeatedly held that
review must be “ ‘sufficient to ensure that arbitrators comply with the
requirements of the statute.’ ” (Armendariz v. Foundation Heath Psychcare
Services, Inc.
, supra, 24 Cal.4th at p. 106, quoting Shearson/American Express
Inc. v. McMahon
, supra, 482 U.S. at p. 232; see also, e.g., Gilmer v.
Interstate/Johnson Lane Corp.
(1991) 500 U.S. 20, 32, fn. 4; Gentry v. Superior
Court
(2007) 42 Cal.4th 443, 456-457; Aguilar v. Lerner (2004) 32 Cal.4th 974,
983; Board of Education v. Round Valley Teachers Assn. (1996) 13 Cal.4th 269,
276; Moncharsh, supra, 3 Cal.4th at p. 32.)

20

mention in the majority opinion indicates that Hall Street’s holding on the effect

of the FAA is a limited one.

Moreover,

the Hall Street majority’s disposition of the case before it

suggests that its interpretation of sections 10 and 11 of the FAA does not preclude

other grounds for review. Rather than simply affirming the reversal of the

judgment modifying the arbitrator’s award, the majority vacated and remanded for

consideration of the trial court’s authority to approve the parties’ agreement as a

matter of case management under the Federal Rules of Civil Procedure. Had the

majority meant to impose a uniform national policy requiring judicial review

solely on the grounds stated in the FAA, it would not have left open the possibility

of trial court review under its “case management authority independent of the

FAA.” (Hall Street, supra, __ U.S. at p. __ [128 S.Ct. at p. 1407].)

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.”

(Mitsubishi Motors v. Soler Chrysler-Plymouth, supra, 473 U.S. at p. 625; see 9

U.S.C. § 2.)

3.

Moncharsh and the California Rule

In

Moncharsh, the parties’ arbitration clause included no provision for an

expanded scope of judicial review. (Moncharsh, supra, 3 Cal.4th at p. 7, fn. 1.)

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. (Id. at p. 28.) We reaffirmed “the general

rule that an arbitrator’s decision is not ordinarily reviewable for error by either the

trial or appellate courts” (id. at p. 13), and held that the statutory grounds for

review were intended to implement that rule (id. at pp. 27-28). To that extent, our

conclusions were consistent with those of the Hall Street majority. However, in

21

several respects Moncharsh reflects a very different view of arbitration agreements

and the arbitration statutes, as applied to the scope of judicial review. Therefore,

we disagree with the dealers’ argument that Hall Street is persuasive authority for

a restrictive interpretation of the review provisions in the CAA.

Moncharsh began from the premise that “ ‘[t]he scope of arbitration is . . .

a matter of agreement between the parties’ [citation], and ‘ “[t]he powers of an

arbitrator are limited and circumscribed by the agreement or stipulation of

submission.” ’ [Citations.]” (Moncharsh, supra, 3 Cal.4th at p. 8.) “ ‘The policy

of the law in recognizing arbitration agreements and in providing by statute for

their enforcement is to encourage persons who wish to avoid delays incident to a

civil action to obtain an adjustment of their differences by a tribunal of their own

choosing. [Citation.]’ ” (Id. at p. 9.) “Because the decision to arbitrate grievances

evinces the parties’ intent to bypass the judicial system and thus avoid potential

delays at the trial and appellate levels, arbitral finality is a core component of the

parties’ agreement to submit to arbitration. Thus, an arbitration decision is final

and conclusive because the parties have agreed that it be so. By ensuring that an

arbitrator’s decision is final and binding, courts simply assure that the parties

receive the benefit of their bargain.” (Id. at p. 10.)

“Moreover, ‘[a]rbitrators, unless specifically required to act in conformity

with rules of law, may base their decision upon broad principles of justice and

equity, and in doing so may expressly or impliedly reject a claim that a party

might successfully have asserted in a judicial action.’ [Citations.]” (Moncharsh,

supra, 3 Cal.4th at pp. 10-11.) “Thus, both because it vindicates the intentions of

the parties that the award be final, and because an arbitrator is not ordinarily

constrained to decide according to the rule of law, it is the general rule that, ‘The

merits of the controversy between the parties are not subject to judicial review.’

[Citations.]” (Id. at p. 11.)

Our reasoning in Moncharsh centered not on statutory restriction of the

parties’ contractual options, but on the parties’ intent and the powers of the

22

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. (Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9

Cal.4th [362,] 375-376.) ‘The powers of an arbitrator derive from, and are limited

by, the agreement to arbitrate. [Citation.] Awards in excess of those powers may,

under sections 1286.2 and 1286.6, be corrected or vacated by the court.’ (Id. at p.

375.)” (Gueyffier v. Ann Summers, Ltd. (2008) 43 Cal.4th 1179, 1185

(Gueyffier).) 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.

The current version of the CAA was enacted following a study by the

California Law Revision Commission, undertaken at the Legislature’s direction.

(Moncharsh, supra, 3 Cal.4th at p. 24.) “The commission’s report was transmitted

to the Governor in December 1960. ([Arbitration Study, supra, 3 Cal. Law

Revision Com. Rep.].) On the subject of the scope of judicial review, the report

explained that, ‘Nothing in the California statute defines the permissible scope of

review by the courts. Numerous court rulings have, however, developed the

23

following basic principles which set the limits for any court review: [¶] . . . [¶] (2)

Merits of an arbitration award either on questions of fact or of law may not be

reviewed except as provided for in the statute in the absence of some limiting

clause in the arbitration agreement.’ ” (Moncharsh, at p. 24, quoting Arbitration

Study, supra, p. G-53.)

“The Arbitration Study emphasized that arbitration should be the end of

the dispute and that ‘the ordinary concepts of judicial appeal and review are not

applicable to arbitration awards. Settled case law is based on this assumption.’

(Arbitration Study, supra, [3 Cal. Law Revision Com. Rep.] p. G-54.) [15] After

surveying the state of the law, the report concluded that although the California

statutes do not ‘attempt to express the exact limits of court review of arbitration

awards, . . . no good reason exists to codify into the California statute the case law

as it presently exists.’ (Ibid.) Further, the report recommended that the ‘present

grounds for vacating an award should be left substantially unchanged.’ (Id. at p.

G-57.)” (Moncharsh, supra, 3 Cal.4th at p. 25.) Considering the nature of the

revisions incorporated in the CAA, this court concluded that the Legislature

intended to “adopt the position taken in case law and endorsed in the Arbitration

Study, 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, quoting

Crofoot, supra, 119 Cal.App.2d at p. 186.)

The

Crofoot rule does not suggest that review of the merits must rest on a

nonstatutory basis. As discussed below, Crofoot’s reference to a limiting clause in

15

The study makes it clear that the assumption noted above is drawn from

the normal form of agreement to conclusive arbitration, and the statutes
accommodating that norm. “Both the agreement between the parties that the
award shall be final and binding and the statutory treatment of arbitration
agreements suggest that the ordinary concepts of judicial appeal and review are
not applicable . . . .” (Arbitration Study, supra, 3 Cal. Law Revision Com. Rep.,
p. G-54.)

24

the agreement pertains to limits on the arbitrators’ powers. Thus, the merits of an

award may come within the ambit of the statutory grounds of review for excess of

the arbitrators’ powers. (§§ 1286.2, subd. (a)(4), 1286.6, subd. (b).) However,

absent such a limitation, the scope of review provided by statute is quite limited.

In Moncharsh, we noted that section 1286.2 includes no provision for review of

the merits like that found in section 1296, governing public construction contract

arbitrations.16 (Moncharsh, supra, 3 Cal.4th at pp. 25-26.) The Crowell court, and

the Court of Appeal below, considered section 1296 an indication that the

Legislature did not intend to permit review of the merits by agreement. (Crowell,

supra, 95 Cal.App.4th at pp. 737-738.) This view is mistaken. In Moncharsh we

inferred from section 1296 that “the Legislature did not intend to confer traditional

judicial review in private arbitration cases.” (Moncharsh, at p. 26.) However, the

failure to provide for that scope of review by statute does not mean the parties

themselves may not do so by contract. Moreover, section 1296 authorizes review

for legal error without any specific agreement to that effect. The parties to a

public construction contract need only provide that the award must be supported

by law and substantial evidence. Thus, section 1296 says nothing about the

Legislature’s intent regarding contracts expressly permitting review on the merits.

Our

holding

in

Moncharsh that the CAA incorporates the Crofoot rule is

irreconcilable with the notion that the parties are barred from agreeing to limit the

arbitrators’ authority by subjecting their award to review on the merits. The

history of the FAA, as reviewed by the Hall Street majority, includes no similar

indication that Congress intended the statutory grounds for review to operate as

16

Section 1296 states: “The parties to a construction contract with a public

agency may expressly agree in writing that in any arbitration to resolve a dispute
relating to the contract, the arbitrator’s award shall be supported by law and
substantial evidence. If the agreement so provides, a court shall, subject to Section
1286.4, vacate the award if after review of the award it determines either that the
award is not supported by substantial evidence or that it is based on an error of
law.”

25

default provisions, providing only limited review unless the parties agree

otherwise. (Hall Street, supra, __ U.S. at p. __, fn. 7 [128 S.Ct. at pp. 1405, 1406,

fn. 7].) Nor did Hall Street address whether the FAA provision for vacatur “where

the arbitrators exceeded their powers” (9 U.S.C. § 10(a)(4)) is applicable when the

agreement specifically limits the arbitrators’ powers by providing for an award

governed by law and reviewable for legal error. Therefore, Hall Street’s FAA

analysis is inapposite.

In California, the policy favoring arbitration without the complications of

traditional judicial review is based on the parties’ expectations as embodied in

their agreement, and the CAA rests on the same foundation. “Accordingly,

policies favoring the efficiency of private arbitration as a means of dispute

resolution must sometimes yield to its fundamentally contractual nature, and to the

attendant requirement that arbitration shall proceed as the parties themselves have

agreed.” (Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 831.) The scope

of judicial review is not invariably limited by statute; rather, “the parties, simply

by agreeing to arbitrate, are deemed to accept limited judicial review by

implication.” (Ibid.) It follows that they may expressly agree to accept a broader

scope of review.17

17

Law review commentary has tended to support this view. (Goldman,

Contractually Expanded Review of Arbitration Awards (2003) 8 Harv. Negot.
L.Rev. 171, 183-184 (Goldman); Hulea, Contracting to Expand the Scope of
Review of Foreign Arbitral Awards: An American Perspective
(2003) 29 Brook. J.
Int’l L. 313, 351 (Hulea); Moses, Can Parties Tell Courts What to Do? Expanded
Judicial Review of Arbitral Awards
(2004) 52 U.Kan. L.Rev. 429, 430-431
(Moses); Rau, Contracting Out of the Arbitration Act (1997) 8 Am. Rev. Int’l Arb.
225, 230-231 (Rau); but see Schmitz, Ending a Mud Bowl: Defining Arbitration’s
Finality Through Functional Analysis
(2002) 37 Ga. L.Rev. 123, 189-190; Smit,
Contractual Modification of the Scope of Judicial Review of Arbitral Awards
(1997) 8 Am. Rev. Int’l Arb. 147, 150.)


The approach to judicial review outlined in the concurring and dissenting

opinion is a novel one. Whatever its merits may be, the parties in this case
certainly did not agree to such a scope of review. Nor is it reflected in any
reported case. If “the CAA permits parties to clearly define the limits to an

26

Neither

Crofoot, the Arbitration Study, nor Moncharsh had occasion to

explore the nature of the “limiting clause in the arbitration agreement” that all

these sources recognized as an exception to the usual rule barring review of the

merits of an award. (Crofoot, supra, 119 Cal.App.2d at p. 186; Arbitration Study,

supra, 3 Cal. Law Revision Com. Rep., p. G-53; Moncharsh, supra, 3 Cal.4th at p.

25.) In the case before it, the Crofoot court rejected the claim that the parties’

agreement limited the arbitrator’s powers. (Crofoot, supra, 119 Cal.App.2d at pp.

186-187.) However, the two authorities cited in Crofoot that discuss contract

limitations suggest the scope of judicial review may be expanded by provisions

restricting arbitrators’ usual broad powers.

Crofoot quoted Sapp v. Barenfeld (1949) 34 Cal.2d 515, 523, for the

proposition that “ ‘[a]rbitrators, unless specifically required to act in conformity

with rules of law, may base their decision upon broad principles of justice and

equity, and in doing so may expressly or impliedly reject a claim that a party

might successfully have asserted in a judicial action.’ ” (Crofoot, supra, 119

Cal.App.2d at p. 185, italics added; see also Moncharsh, supra, 3 Cal.4th at pp.

10-11.) The Sapp court followed this statement with a citation to Gerdetz v.

Central Oregon Irr. Co. (Or. 1917) 163 P. 980, where the court reviewed the

parties’ agreement and observed: “We note that no restriction is placed upon the

arbitrators in any degree within their respective provinces. No reservation is made

for reviewing any decision of law or fact. The case is not like many of those cited

in the plaintiff’s brief where the arbitrators were required to determine questions

of law according to legal rules and the decisions of the courts on identical matters.

Neither is it like other instances where the statute requires the award to be made

agreeable to certain precepts or in pursuance of an order or rule of court where the


arbitrator’s powers,” it is unclear why they should be allowed only “some measure
of judicial review” defined by a court, instead of the scope of review authorized by
their contract and the statutes permitting review for excess of the arbitrator’s
powers. (Conc. & dis. opn., post, at p. 12.)

27

award must be subject to the approval of the tribunal making the order. In the

instant case the unrestricted terms of the submission differentiate it from all such

precedents. It is said in 5 C. J. 183: [¶] ‘In the absence of a special requirement,

the arbitrators are not bound to decide according to law, and therefore in such case

a mistaken construction of the law has been held not sufficient ground of

avoidance of an award . . . .’ ” (Gerdetz, supra, at pp. 981-982, italics added.)

The Crofoot court also relied on Kagel, California Arbitration Statute

(1950) 38 Cal. L.Rev. 799, 825 et seq. (Kagel). (Crofoot, supra, 119 Cal.App.2d

at p. 185.) There, the author stated: “Whether an arbitrator’s decision on

questions of law and facts is final and not subject to judicial review seems to

depend on the submission agreement. . . . If the submission agreement is qualified

and provides, for example, that an arbitrator should ‘make his judgment and award

according to the legal rights of the parties,’ . . . apparently the award is subject to

judicial review.” (Kagel, supra, at p. 827.)18 After quoting Sapp v. Barenfeld,

supra, 34 Cal.2d 515, to the same effect as in Crofoot, Kagel concluded: “The

wording of the arbitration clause or submission agreement is important then,

affecting the limits of review.” (Kagel, supra, at p. 827.)

The Arbitration Study discussed in Moncharsh includes a similar

observation. Regarding the statutory ground of review for excess of the

18

In a footnote, Kagel refers to Utah Const. Co. v. Western Pac. Ry. Co.

(1916) 174 Cal. 156. (Kagel, supra, 38 Cal. L.Rev. at p. 827, fn. 126.) The
agreement in that case included a clause calling for the arbitrator to “make his
judgment and award, according to the legal right of the parties . . . .” (174 Cal. at
p. 161.) The court noted that this provision “bound the arbitrator to decide in
conformity with the law, and left him without authority to do otherwise.” (Id. at
pp. 161-162.) However, it then said: “Our final conclusion on the merits renders
it unnecessary to determine whether the submission agreement, when properly
construed, did or did not empower him to decide the law wrongly as well as
rightly. We may assume, for the purposes of the case, that he was empowered
only to decide correctly as to the law, and proceed upon that theory without
deciding the point.” (Id. at p. 163.) The court reviewed the award and found no
legal error. (Id. at pp. 163-167.)

28

arbitrators’ powers, the study stated: “Arbitrators may base their decision upon

broad principles of justice and equity, but if the submission agreement specifically

requires an arbitrator to act in conformity with rules of law, the arbitrator exceeds

his authority if his decision is not based on rules of law.” (Arbitration Study,

supra, 3 Cal. Law Revision Com. Rep, p. G-56, fns. omitted.)

These early authorities might be read to support a rule that a provision

simply requiring the arbitrators to follow the rule of law places it beyond their

powers to apply the law incorrectly, so that the award may be vacated or modified

on that basis. However, the Legislature has since enacted a similar rule for public

contract arbitrations. (§ 1296; see fn. 16, ante, and accompanying text.)19 Had it

intended to make review of the merits generally available on that basis,

presumably it would have included a similar provision in sections 1286.2 and

1286.6. Moreover, requiring the parties to expressly provide for an expanded

scope of review is consistent with the usual expectations of parties to arbitration

agreements, who accept the risk of legal error in exchange for the benefits of a

quick, inexpensive, and conclusive resolution. (See Moncharsh, supra, 3 Cal.4th

at pp. 11-12.)

A provision requiring arbitrators to apply the law leaves open the

possibility that they are empowered to apply it “wrongly as well as rightly.”

(Utah Const. Co. v. Western Pac. Ry. Co., supra, 174 Cal. at p. 163; see Baize,

supra, 142 Cal.App.4th at pp. 301-302.) As we recently observed: “When parties

contract to resolve their disputes by private arbitration, their agreement ordinarily

contemplates that the arbitrator will have the power to decide any question of

contract interpretation, historical fact or general law necessary, in the arbitrator’s

understanding of the case, to reach a decision. (Moshonov v. Walsh (2000) 22

Cal.4th [771,] 775-777; Advanced Micro Devices, Inc. v. Intel Corp., supra, 9

Cal.4th at pp. 372-375; Moncharsh . . . supra, 3 Cal.4th at p. 28.) Inherent in that

19

DIRECTV has requested that we take judicial notice of the legislative

history of section 1296. We grant the request, but do not find the history useful.

29

power is the possibility the arbitrator may err in deciding some aspect of the case.

Arbitrators do not ordinarily exceed their contractually created powers simply by

reaching an erroneous conclusion on a contested issue of law or fact, and arbitral

awards may not ordinarily be vacated because of such error, for ‘ “[t]he

arbitrator’s resolution of these issues is what the parties bargained for in the

arbitration agreement.” ’ (Moshonov v. Walsh, at pp. 775-776, 699, quoting

Moncharsh . . . at p. 28.)” (Gueyffier, supra, 43 Cal.4th at p. 1184.)

Therefore, 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. Here, the

parties expressly so agreed, depriving the arbitrators of the power to commit legal

error. They also specifically provided for judicial review of such error. 20 We do

not decide here whether one or the other of these clauses alone, or some different

formulation, would be sufficient to confer an expanded scope of review.

However, we emphasize 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. (Cf. Advanced Micro

Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at p. 383.)

Those Court of Appeal opinions refusing to enforce specific provisions for

judicial review of the merits are disapproved insofar as they conflict with our

analysis. (Crowell v. Downey Community Hospital Foundation, supra, 95

Cal.App.4th at p. 735; Oakland-Alameda County Coliseum Authority v. CC

Partners, supra, 101 Cal.App.4th 635, 645; Old Republic Ins. Co. v. St. Paul Fire

20

The arbitration clause states: “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.”

30

& Marine Ins. Co., supra, 45 Cal.App.4th 631, 638-639.) The objections raised in

these cases are outweighed by the freedom of contract that is fundamental to

arbitration, by the availability of an expanded scope of review in other contexts,

and by the considerable public and private benefits that such review can provide.

Review on the merits has been deemed incompatible with the goals of

finality and informality that are served by arbitration and protected by the

arbitration statutes. (Crowell, supra, 95 Cal.App.4th at p. 735; Old Republic,

supra, 45 Cal.App.4th at p. 638.) However, as discussed above, those policies

draw their strength from the agreement of the parties. It is the parties who are best

situated to weigh the advantages of traditional arbitration against the benefits of

court review for the correction of legal error.

Arbitration provisions calling for review of the merits have also been

condemned as attempts to create jurisdiction where none exists. (Crowell, supra,

95 Cal.App.4th at p. 739; Old Republic, supra, 45 Cal.App.4th at pp. 638-639.)

But the CAA authorizes review on the ground that an award exceeds the

arbitrators’ powers. (§§ 1286.2, subd. (a)(4), 1286.6, subd. (b).) Because those

powers are circumscribed by the terms of the parties’ agreement (Gueyffier, supra,

43 Cal.4th at p. 1185; Moncharsh, supra, 3 Cal. 4th at p. 8), there is no

jurisdictional impediment to contracts limiting the arbitrators’ authority by

subjecting their award to correction for legal error.

Some courts have expressed concern that arbitration is so different from

judicial proceedings that courts would be unable to adequately review the

substance of arbitrators’ decisions. (National Union, supra, 69 Cal.App.4th at pp.

715-716; Old Republic, supra, 45 Cal.App.4th at p. 638.) This problem has not

appeared in those circumstances where arbitration awards have been reviewed for

legal error. Section 1296 has provided for review of the merits in public

construction contract arbitrations since 1979. Arbitration awards have been

reviewed to determine whether the arbitrators complied with statutes conferring

unwaivable rights. (See, e.g., Aguilar v. Lerner, supra, 32 Cal.4th 974, 982-983;

31

Board of Education v. Round Valley Teachers Assn., supra, 13 Cal.4th 269, 276-

277.) Until recently, federal courts have reviewed arbitration awards under

agreements calling for an expanded scope of review. (See fn. 9, ante.) Obstacles

to effective review have not been evident in any of these settings. 21 Problems

with the record are not reflected in the cases, but in the event they arise, there is a

ready solution in the familiar rule that the decision under review is presumed

correct on matters where the record is silent. (Ketchum v. Moses (2001) 24

Cal.4th 1122, 1140-1141; see Lopes v. Millsap (1992) 6 Cal.App.4th 1679, 1685;

Goldman, supra, 8 Harv. Negot. L.Rev. at p. 187.)

To the extent the concern with reviewability arises from apprehension that

permitting review on the merits would open the door to contracts imposing

unfamiliar standards of review, it appears to be unfounded. We have discovered

no case where the parties attempted to make the courts apply an unusual standard

of review. Instead, as in this case, they have required the arbitrators to apply legal

standards, resulting in awards that can be reviewed in traditional fashion. (See

Goldman, supra, 8 Harv. Negot. L.Rev. at p. 186.) We need not speculate about

provisions calling for bizarre modes of decision, but we note that arbitration

agreements are “as enforceable as other contracts, but not more so.” (Prima Paint

Corp. v. Flood & Conklin (1967) 388 U.S. 395, 404, fn. 12; Cronus, supra, 35

Cal.4th at p. 384.) Thus, just as the parties to any contract are limited in the

constraints they may place on judicial review, an arbitration agreement providing

that a “judge would review the award by flipping a coin or studying the entrails of

a dead fowl” would be unenforceable. (LaPine, supra, 130 F.3d 884, 891 (conc.

opn. of Kozinski, J.); see Cole, Managerial Litigants? The Overlooked Problem

21

It is noteworthy that the Court of Appeal below, despite its holding

limiting the scope of review, had no difficulty examining the merits of the
arbitrators’ decision on the alternative assumption that the award was reviewable
for legal error.

32

of Party Autonomy in Dispute Resolution (2000) 51 Hastings L.J. 1199, 1263

(Cole).)

The 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. Commentators have observed that provisions for

expanded judicial review are a product of market forces operating in an

increasingly “judicialized” arbitration setting, with many of the attributes of court

proceedings. The desire for the protection afforded by review for legal error has

evidently developed from the experience of sophisticated parties in high stakes

cases, where the arbitrators’ awards deviated from the parties’ expectations in

startling ways. (Goldman, supra, 8 Harv. Negot. L.Rev. at pp. 172-173; Cole,

supra, 51 Hastings L.J. at p. 1243; Brunet, Replacing Folklore Arbitration with a

Contract Model of Arbitration (1999) 74 Tulane L.Rev. 39, 40-42, 52-57, 62-63;

Younger, Agreements to Expand the Scope of Judicial Review of Arbitration

Awards (1999) 63 Alb. L.Rev. 241.)

The 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. (See Crowell,

supra, 95 Cal.App.4th at pp. 752-753 (dis. opn. of Nott, J.); LaPine, supra, 130

F.3d at pp. 888-889; Fils et Cables d’Acier de Lens v. Midland Metals Corp.,

supra, 584 F.Supp. at p. 244; Moses, supra, 52 U. Kan. L.Rev. at p. 443;

Goldman, supra, 8 Harv. Negot. L.Rev. at p. 184; Hulea, supra, 29 Brook. J. Int’l

L. at pp. 353-354.) Courts are spared not only the burden of conducting a trial, but

also the complications of discovery disputes and other pretrial proceedings.

Incorporating 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

33

arbitral process, its handling of disputed rules of law. (See Rau, supra, 8 Am.

Rev. Int’l Arb. at p. 233; Hulea, supra, 29 Brook. J. Int’l L. at p. 354.)

There are also significant benefits to the development of the common law

when arbitration awards are made subject to merits review by the parties’

agreement. “[I]f courts are reduced to the function of merely enforcing or denying

arbitral awards, without an opportunity to discuss the reasoning for the arbitral

decision, the advancement of the law is stalled, as arbitral decisions carry no

precedential value. [Fn. omitted.] Thus, expansion of judicial review gives the

courts of first instance the opportunity to establish a record, and to include the

reasoning of expert arbitrators into the body of the law in the form of written

decisions. This procedure better advances the state of the law and facilitates the

necessary beneficial input from experts in the field.” (Hulea, supra, 29 Brook. J.

Int’l L. at pp. 354-355.)

These advantages, obtained with the consent of the parties, are substantial.

As explained in Moncharsh, 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. (Moncharsh, supra, 3 Cal.4th at p. 25.) The Court of

Appeal erred by refusing to enforce the parties’ clearly expressed agreement in

this case.

B.

The Award Permitting Classwide Arbitration

Two of the three arbitrators below decided the dealers could pursue

arbitration on a classwide basis, although the parties’ contract did not mention

classwide arbitration. The Court of Appeal agreed with this determination. The

34

contract calls for the arbitrators to apply California substantive law, while

following the procedural requirements of AAA rules and the FAA.22

The Court of Appeal, and the arbitrators in the majority, viewed the right to

pursue classwide arbitration as a substantive one under Keating, supra, 31 Cal.3d

584, and Blue Cross, supra, 67 Cal.App.4th 42. The court concluded that these

cases “give[] arbitrators discretion to order classwide arbitration even where the

arbitration agreement is silent on that issue, in divergence from the general rules of

contract interpretation that terms are not to be inserted into contracts.”

This reasoning suffers from several lapses. Assuming the right to classwide

arbitration may be viewed as substantive rather than procedural, a question we do

not address here, the Keating rule is that courts have the authority to order

classwide arbitration when an arbitration clause appears in a contract of adhesion,

and “gross unfairness would result from the denial of opportunity to proceed on a

classwide basis.” (Keating, supra, 31 Cal.3d at p. 613; see also Blue Cross, supra,

67 Cal.App.4th at pp. 52-55.) The Keating court did not speak to whether

arbitrators have that authority. We have since held that whether an arbitration

clause is unconscionable “is for the courts to decide, not an arbitrator.” (Discover

Bank v. Superior Court, supra, 36 Cal.4th at p. 171.) In any event, here the

dealers did not claim and the arbitrators did not find that the contract was

adhesive, or that a denial of classwide arbitration would lead to gross unfairness.

Furthermore, the majority arbitrators did not need to turn to Keating for

authority to order classwide arbitration. The AAA rules invoked in the arbitration

clause expressly confer that power on the arbitrators. Their task under the relevant




22 The arbitration clause provides in relevant part: “Any dispute or claim

arising out of the interpretation, performance, or breach of this Agreement . . .
shall be resolved only by binding arbitration, at the request of either party, in
accordance with the rules of the American Arbitration Association . . . . The
arbitrators shall apply California substantive law to the proceeding, except to the
extent Federal substantive law would apply to any claim.” The clause further
specifies: “This Section and any arbitration conducted hereunder shall be
governed by the United States Arbitration Act (9 U.S.C. Section 1, et seq.).”

35

rule was to “determine as a threshold matter, in a reasoned, partial final award on

the construction of the arbitration clause, whether the applicable arbitration clause

permits the arbitration to proceed on behalf of or against a class.” (AAA,

Supplementary Rules for Class Arbitrations (Oct. 2003), rule 3.) DIRECTV

claims that in making this decision, the arbitrators in the majority violated a

provision of the AAA rules stating: “In construing the applicable arbitration

clause, the arbitrator shall not consider the existence of these Supplementary

Rules, or any other AAA rules, to be a factor either in favor of or against

permitting the arbitration to proceed on a class basis.” (Ibid.)

DIRECTV appears to be correct. The majority award referred both to the

Keating rule and to AAA rules and policy. The policy specifying that AAA “will

administer demands for class arbitration . . . when . . . the agreement is silent with

respect to class claims” (AAA, Policy on Class Arbitrations (July 14, 2005), italics

added) was misquoted in the award as stating that AAA “will admit demands for

class arbitration” when the agreement is silent. The majority then relied on that

proposition to support the conclusion that “the clause construction aspect under

the Association rules provides for class arbitration to be allowed unless the

arbitrators find that the arbitration clause forbids it.” Thus, the majority does seem

to have considered the existence of AAA provisions governing classwide

arbitration as a factor favoring the procedure.

36



AAA’s class arbitration policy is based on the Bazzle decision.23 The

Bazzle plurality declared: “[T]he relevant question here is what kind of arbitration

proceeding the parties agreed to. That question does not concern a state statute or

judicial procedures, cf. [Volt, supra,] 489 U.S. 468, 474-476 . . . . It concerns

contract interpretation and arbitration procedures. Arbitrators are well situated to

answer that question.” (Bazzle, supra, 539 U.S. at pp. 452-453 (plur. opn. of

Breyer, J.).) We express no view on whether the terms of this arbitration clause

are consistent with conducting arbitration on a classwide basis. Instead of

deciding that question, the majority arbitrators misapplied AAA rules and policy

as well as the Keating rule. Under the circumstances, we deem it appropriate to

permit the arbitration panel to reconsider the availability of classwide arbitration

as a matter of contract interpretation and AAA arbitration procedure.

23

In relevant part, the policy states: “On October 8, 2003, in response to

the ruling of the United States Supreme Court in Green Tree Financial Corp. v.
Bazzle, the American Arbitration Association issued its Supplemental Rules for
Class Arbitrations to govern proceedings brought as class arbitrations. In Bazzle,
the Court held that, where an arbitration agreement was silent regarding the
availability of class-wide relief, an arbitrator, and not a court, must decide whether
class relief is permitted. Accordingly, the American Arbitration Association will
administer demands for class arbitration pursuant to its Supplementary Rules for
Class Arbitrations if (1) the underlying agreement specifies that disputes arising
out of the parties’ agreement shall be resolved by arbitration in accordance with
any of the Association’s rules, and (2) the agreement is silent with respect to class
claims, consolidation or joinder of claims.” (AAA, Policy on Class Arbitrations,
supra.)

37

III. DISPOSITION

We reverse the judgment of the Court of Appeal, with directions to instruct

the trial court to vacate the award so that the arbitrators may redetermine whether

the arbitration may proceed on a classwide basis.

CORRIGAN, J.



WE CONCUR:


KENNARD, J.
BAXTER, J.
WERDEGAR, J.
CHIN, J.


38








CONCURRING OPINION BY BAXTER, J.

I join fully in the majority opinion, including its principal holding that,

under the California Arbitration Act (Code Civ. Proc., § 1280 et seq.), judicial

review of the merits of an arbitration award is permissible where, as here, the

contracting parties have expressly agreed that the arbitrators shall have no power

to commit errors of law and that the award may be vacated or corrected on appeal

for legal error.

I write separately, however, to highlight the majority’s point that

“arbitration agreements are ‘as enforceable as other contracts, but not more so.’

[Citations.]” (Maj. opn., ante, at p. 32, italics added.) The majority correctly

observes that, just as the parties to any contract are limited in the constraints they

may place on judicial review, parties to an arbitration agreement may not

contractually secure an arbitrary method of review. (Ibid.) Similarly, just as

parties to a court action may appeal a final judgment and only certain interlocutory

judgments and orders (Code Civ. Proc., §§ 904, 904.1, 904.2), parties proceeding

under the California Arbitration Act may obtain confirmation, correction, or

vacation only of an arbitral decision that constitutes an “award” within the act’s

contemplation (Code Civ. Proc., § 1285; see Code Civ. Proc., § 1283.4 [providing

that an award shall include “a determination of all the questions submitted to the

arbitrators the decision of which is necessary in order to determine the

controversy”]). Thus, if parties litigating in court may not create premature

appellate jurisdiction by mutual agreement (see, e.g., Hill v. City of Clovis (1998)

63 Cal.App.4th 434), it is questionable whether parties to an arbitration agreement

1

may contract to obtain premature judicial merit review of arbitral decisions that

are labeled as “awards,” but which in substance merely resolve one or more legal

or factual issues pertaining to only a portion of the controversy submitted to the

arbitrators for their determination. Our court has not addressed this issue, and it

has not been raised or litigated in the instant case.

For the record, at least one Court of Appeal decision indicates that

arbitrators have discretion to utilize multiple, incremental, or successive awards to

finally decide an arbitrable controversy, and that parties may petition to confirm,

correct, or vacate such incremental awards. (Roehl v. Ritchie (2007) 147

Cal.App.4th 338 [merit review not implicated]; see generally 3 Oehmke,

Commercial Arbitration (3d ed. 2004 & 2007 supp.) § 122:1.) Nonetheless, there

may be limitations under the California Arbitration Act concerning the types of

incremental or interim-type arbitral decisions that will validly support a petition

for immediate judicial review. Indeed, access to merit review on an unlimited

piecemeal basis may detract from the identified benefits of such review (see maj.

opn., ante, at pp. 32-34), and also may saddle the judiciary with burdens that the

drafters of our state act did not intend.

Accordingly, I generally agree that “[t]he California rule is that the parties

may obtain judicial review of the merits by express agreement” (maj. opn., ante, at

p. 2), and that “[e]nforcing contract provisions for review of awards on the merits

relieves pressure on congested trial court dockets” (id. at p. 33). I reserve

judgment, however, as to what if any limitations may exist with regard to such

agreements, particularly when they purport to require fragmented review of the

individual issues that are part and parcel of the arbitrable controversy.













BAXTER, J.

2









CONCURRING AND DISSENTING OPINION BY MORENO, J.

I agree with the majority to the extent it holds 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 v.

Heily & Blase (1992) 3 Cal.4th 1 (Moncharsh). But I disagree that parties may

oblige courts to undertake fullscale judicial review of legal error in arbitration

awards. Rather, the relevant statutes and the pertinent legislative history reveals a

legislative intent to circumscribe the scope of judicial review and defer to the

judgment of the arbitrator. As elaborated below, the statutes permit an arbitration

agreement to be structured in such a way as to compel a court to vacate an award

when the arbitrator, in addressing legal questions, has acted arbitrarily and

unreasonably, such as departing from clearly defined contractual terms or from

clear legal principles found in the body of law that the parties have agreed should

be used to settle the dispute. On the other hand, when an arbitrator’s answer to a

legal question is not clearly erroneous, for example, when he or she reasonably

answers a legal question in which there is no settled precedent, the statute does not

authorize a court to vacate an arbitrator’s award merely because it disagrees with

the arbitrator’s conclusions, no matter what the arbitration agreement provides.

Because the arbitrators in this case acted reasonably in addressing a question of

unsettled law, I would affirm the judgment of the Court of Appeal.

1

I.

I begin the analysis by stating the obvious, although the point may be

obscured by the majority’s rhetoric regarding freedom of contract. Although

arbitration is created by contract, and the terms of the arbitration are dictated by

contractual provisions, courts are not parties to arbitration agreements, and they

are not bound by their terms. Parties can agree that a legal dispute arising from

their arbitration will be settled by the California Supreme Court, but this court is

not bound by that agreement. The judicial acts of confirming, correcting or

vacating arbitration awards are governed by statute, and the parties have no power

to alter the circumstances under which such acts occur except to the extent that the

relevant statutes permit such alteration. I therefore turn to an analysis of the

governing statutes.

Code of Civil Procedure section 12861 provides that if a petition to confirm

an arbitration award under the California Arbitration Act (CAA) is duly served

and filed, “the court shall confirm the award as made . . . unless in accordance

with this chapter it corrects the award and confirms it as corrected, vacates the

award or dismisses the proceeding.” (Italics added.) Section 1286.2 provides that

a court petitioned to confirm an arbitration award “shall vacate the award if the

court determines any of the following: (1) The award was procured by corruption,

fraud or other undue means. [¶] (2) There was corruption in any of the arbitrators.

[¶] (3) The rights of the party were substantially prejudiced by misconduct of a

neutral arbitrator. [¶] (4) The arbitrators exceeded their powers and the award

cannot be corrected without affecting the merits of the decision upon the

controversy submitted. [¶] (5) The rights of the party were substantially

prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient


1

All statutory references are to this code unless otherwise indicated.

2

cause being shown therefor or by the refusal of the arbitrators to hear evidence

material to the controversy or by other conduct of the arbitrators contrary to the

provisions of this title. [¶] (6) An arbitrator making the award [failed to make

certain required disclosures or to disqualify himself or herself after properly

requested to do so by the parties].” Section 1286.6 provides grounds for

correction when there is evidence of miscalculation or mistake in the award, or the

arbitrator committed errors that go to form rather than substance. Section 1287.2

provides for dismissal if a court determines that any person named as a respondent

was in fact not a party to the arbitration or bound by the arbitration award.

The United States Supreme Court recently rejected the notion that similarly

worded provisions in the Federal Arbitration Act (FAA) were merely intended to

be default provisions, to be used when the parties had not agreed otherwise. “On

application for an order confirming the arbitration award, the court ‘must grant’

the order ‘unless the award is vacated, modified, or corrected as prescribed in

sections 10 and 11 of this title.’ There is nothing malleable about ‘must grant,’

which unequivocally tells courts to grant confirmation in all cases, except when

one of the ‘prescribed’ exceptions applies. This does not sound remotely like a

provision meant to tell a court what to do just in case the parties say nothing else.”

(Hall Street Associates, L.L.C. v. Mattel, Inc. (2008) __ U.S. ___ [128 S.Ct. 1396,

1405] (Hall Street).) Similarly, I see nothing malleable or in the nature of a

default provision about language of section 1286 that “the court shall confirm the

award as made . . . unless in accordance with this chapter” it corrects or vacates

the award or dismisses the proceedings.

The United States Supreme Court also considered whether the FAA “has

textual features at odds with enforcing a contract to expand judicial review

following the arbitration.” (Hall Street, supra, ___ U.S. at p. ___ [128 S.Ct. at

p. 1404].) “To that particular question we think the answer is yes, that the text

3

compels a reading of the §§ 10 and 11 categories as exclusive. To begin with,

even if we assumed §§ 10 and 11 could be supplemented to some extent, it would

stretch basic interpretive principles to expand the stated grounds to the point of

evidentiary and legal review generally. Sections 10 and 11, after all, address

egregious departures from the parties’ agreed-upon arbitration: ‘corruption,’

‘fraud,’ ‘evident partiality,’ ‘misconduct,’ ‘misbehavior,’ ‘exceed[ing] . . .

powers,’ ‘evident material miscalculation,’ ‘evident material mistake,’ ‘award[s]

upon a matter not submitted;’ the only ground with any softer focus is

‘imperfect[ions],’ and a court may correct those only if they go to ‘[a] matter of

form not affecting the merits.’ Given this emphasis on extreme arbitral conduct,

the old rule of ejusdem generis has an implicit lesson to teach here. Under that

rule, when a statute sets out a series of specific items ending with a general term,

that general term is confined to covering subjects comparable to the specifics it

follows. Since a general term included in the text is normally so limited, then

surely a statute with no textual hook for expansion cannot authorize contracting

parties to supplement review for specific instances of outrageous conduct with

review for just any legal error. ‘Fraud’ and a mistake of law are not cut from the

same cloth.” (Hall Street, supra, ___ U.S. at pp. ___ [128 S.Ct. at pp. 1404-

1405].)

Applying the same principle of ejusdem generis here, the grounds for

vacatur under section 1286.2 also involve “egregious departures from the parties’

agreed-upon arbitration” (Hall Street, supra, ___ U.S. at p. ___ [128 S.Ct. at

p. 1404]): “corruption,” “fraud,” “misconduct,” refusal to make statutorily

required disclosures or comply with statutory disqualification procedures, and

prejudicial refusal to allow reasonable postponement requests or admission of

material evidence. As explained at greater length below, ordinary errors of law do

not fall within the above class.

4

The single “textual hook” on which the majority seeks to hang its

expansion of judicial review is the statutory provision that the award may be

vacated when “[t]he arbitrators exceeded their powers.” (§ 1286.2, subd. (a)(4).)

It is well established that arbitrators do not exceed their powers merely by

committing legal error. (Moncharsh, supra, 3 Cal.4th at p. 28.) As one Court of

Appeal summarized the case law: “An arbitrator exceeds his powers when he acts

without subject matter jurisdiction [citation], decides an issue that was not

submitted to arbitration [citations], arbitrarily remakes the contract [citation],

upholds an illegal contract [citation], issues an award that violates a well-defined

public policy [citation], issues an award that violates a statutory right [citation],

fashions a remedy that is not rationally related to the contract [citation], or selects

a remedy not authorized by law [citations]. In other words, an arbitrator exceeds

his powers when he acts in a manner not authorized by the contract or by law.”

(Jordan v. Department of Motor Vehicles (2002) 100 Cal.App.4th 431, 443.) In

reviewing an arbitration award, a court “must give substantial deference to the

arbitrator’s own assessment of his contractual authority.” (Id. at pp. 443-444; see

Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 372 (Advanced

Micro Devices) [courts must be properly deferential to an arbitrator’s choice of

remedies].)

The majority faults the Hall Street court for failing to consider “whether

the FAA provision for vacatur ‘where the arbitrators exceeded their powers’ (9

U.S.C. § 10(a)(4)) is applicable when the agreement specifically limits the

arbitrators’ powers by providing for an award governed by law and reviewable for

legal error.” (Maj. opn., ante, at pp. 25-26.) Yet the majority does not itself

analyze whether this excess of powers clause provides textual support for full

judicial review of legal error. Had it done so, it would have run up against the

noscitur a sociis rule of construction, a close cousin of the ejusdem generis rule

5

invoked by the Hall Street court. Noscitur a sociis (it is known by its associates)

is the principle that “a word takes meaning from the company it keeps.” (People

v. Drennan (2000) 84 Cal.App.4th 1349, 1355.) “ ‘In accordance with this

principle of construction, a court will adopt a restrictive meaning of a listed item if

acceptance of a more expansive meaning would . . . make the item markedly

dissimilar to the other items in the list.’ ” (People ex rel. Lungren v. Superior

Court (1996) 14 Cal.4th 294, 307.)

In the case of section 1286.2, the enumerated grounds for vacating an

arbitration award involve either some type of misconduct by the arbitrator, or

some type of arbitrary action by the arbitrator that deprives a party of basic

procedural fairness, such as the failure to postpone a hearing on sufficient cause,

denial of the right to put on material evidence, or the failure to make statutorily

required disclosures regarding conflicts of interest. The types of conduct falling

within the excess of powers clause, as interpreted by case law discussed above, fit

the mold of section 1286.2, inasmuch as it is primarily designed to guard against

arbitrary extension of the arbitrator’s jurisdiction to decide questions or fashion

remedies beyond the scope of the arbitration agreement. Judicial review of these

types of objectionable conduct keeps courts at a distance from the merits of the

controversy, and confines judicial scrutiny instead to basic questions of procedural

fairness and jurisdictional propriety, while giving considerable although not

unlimited deference to the arbitrator’s judgment calls. (See Advanced Micro

Devices, supra, 9 Cal.4th at p. 372; Oakland-Alameda County Coliseum v. CC

Partners (2002) 101 Cal.App.4th 635, 641-642.) It is arguably the case that an

arbitrator’s refusal to follow well-settled legal principles arising from a body of

law that the parties have agreed to follow, when the parties have explicitly

constrained the arbitrator to follow that body of law, is that kind of arbitrary

6

behavior that belongs within the scope of section 1286.2. As discussed below, the

legislative history of that section supports this interpretation.

But it is difficult to imagine that the Legislature intended to apply this

excess of powers provision to a situation in which an arbitrator reasonably answers

an unsettled question of law, which answer is not clearly wrong at the time the

arbitrator made his or her award. It seems barely conceivable, especially in light

of the surrounding provisions of section 1286.2 involving arbitral misconduct, or

arbitrary action, that the Legislature intended the phrase “arbitrators exceeded

their powers” to include a situation in which neither has occurred, and in which

the arbitrator has merely given to a question of law an answer with which a

reviewing court may disagree.

The majority quotes from the California Law Revision Commission

(Commission) study that preceded the adoption of the CAA in support of its

expansive interpretation of the excess of powers clause. As the study stated:

“Arbitrators may base their decision upon broad principles of justice and equity,

but if the submission agreement specifically requires an arbitrator to act in

conformity with rules of law, the arbitrator exceeds his authority if his decision is

not based on rules of law.” (Recommendation and Study Relating to Arbitration

(Dec. 1960) 3 Cal. Law Revision Com. Rep. (1961) p. G-56, fns. omitted

(Arbitration Study).) Yet all that this sentence suggests is that the Commission,

and inferentially the Legislature, contemplated that an arbitrator’s blatant

departure from “rules of law” by which the parties had agreed to be bound, and

instead following his or her own idea of justice and equity, constitutes an excess of

powers and grounds for vacatur. The above does not suggest that the parties could

opt for full-blown judicial review of an arbitrator’s reasonable determination of

unsettled legal questions based on that agreed-upon body of law. Such an arbitral

decision would still be “based on rules of law.”

7

The majority’s reliance on other portions of legislative history is similarly

unavailing. The majority quotes the rule in Crofoot v. Blair Holding Corp. (1953)

119 Cal.App.2d 156, 186, which, after discussing case law pertaining to judicial

review of legal error in arbitration awards under the 1927 predecessor to the CAA,

stated: “Under these cases it must be held 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

majority cites to a portion of the Arbitration Study quoting this principle with

approval as evidence that the Commission and the Legislature intended to

incorporate this rule in the 1961 CAA.

Assuming this to be so, the Crofoot rule must be placed in context. As the

court stated in the discussion leading up to its formulation of the rule: “Under the

1927 statute, it is well settled that both before the superior and appellate courts

every intendment of validity must be given the award and that the burden is upon

the one claiming error to support his contention. [Citation.] It has been held that

the arbitrator need not make findings or give reasons for his conclusions. (Sapp v.

Barenfeld (1949) 34 Cal.2d 515.) Certainly it is settled that the courts have no

power to review the sufficiency of the evidence. [Citations.] The law is not quite

so clear as to a court’s powers of review over questions of law. The earlier cases

held that the court had the power to review errors of law, at least where they

appeared upon the face of the award. (In re Frick (1933) 130 Cal.App. 290; Utah

Const. Co. v. Western Pac. Ry. Co. (1916) 174 Cal. 156.) The later cases have

gone much farther in granting finality to the award even as to questions of law. In

Pacific Vegetable Oil Corp. v. C.S.T., Ltd. [(1946)] (29 Cal.2d 228, 233 [174 P.2d

441], it was bluntly held that ‘The merits of the controversy between the parties

are not subject to judicial review.’ In Sapp v. Barenfeld[, supra,] 34 Cal.2d 515,

523, the court held: ‘Even though a party expressly asserts a lawful claim in the

8

submission or raises it by the presentation of evidence to the arbitrators, the law

does not guarantee that the claim will be allowed. Arbitrators, unless specifically

required to act in conformity with rules of law, may base their decision upon broad

principles of justice and equity, and in doing so may expressly or impliedly reject

a claim that a party might successfully have asserted in a judicial action.’

[Citations.] In United States v. Moorman (1950) 338 U.S. 457 the United States

Supreme Court, in upholding as final the arbitrator’s determination, held that,

whether the problem raised was one of law or of fact, the courts should not fritter

away the arbitrator’s powers under the guise of interpretation.” (Crofoot, supra,

119 Cal.App.2d at pp. 185-186, italics added, fn. omitted.)

Thus, the Crofoot rule, rather than being robust support for the majority’s

principle that an arbitration agreement may give rise to full judicial review of an

arbitrator’s legal determinations, is in context rather an undeveloped suggestion

that parties have some limited capacity to qualify the strong rule against judicial

review of legal error. The nature of that capacity is suggested by the court’s

quotation from Sapp v. Barenfeld that arbitrators do not even have to follow the

law, but can follow instead broad principles of equity and justice, unless the

arbitration agreement provides otherwise. Crofoot, and as discussed above, the

Arbitration Study, suggest that the parties can, by agreement, bind the arbitrator to

follow California law or some other established body of legal rules, and can vacate

arbitration awards that clearly depart from such rules and revert to the arbitrator’s

notion of equitable principles, because in such departure the arbitrator exceeds his

or her powers as defined by the parties to the agreement. Neither Crofoot nor the

Arbitration Study suggests that an arbitration award by an arbitrator who

reasonably follows agreed-upon legal principles can be vacated. And the

Arbitration Study, like the passage from Crofoot cited above, reaffirms that

9

“[e]very presumption favors an award by arbitrators.” (Arbitration Study, supra, 3

Cal. Law Revision Com. Rep. at p. G-53.)

The Arbitration Study cites several cases interpreting the 1927 statute in

support of the proposition that the “[m]erits of an arbitration award either on

questions of fact or of law may not be reviewed except as provided for in the

statute in the absence of some limiting clause in the arbitration agreement.”

(Arbitration Study, supra, 3 Cal. Law Revision Com. Rep. at p. G-53; see ibid.,

fn. 142.) None of these cases comes close to supporting a broad mandate for

parties to contract for full-scale judicial review. Of all the cases cited in the

pertinent footnote, only Flores v. Barman (1955) 130 Cal.App.2d 282 reverses the

arbitrator’s legal determinations, concluding that the arbitrator had misconstrued

the plain terms of a collective bargaining agreement by interpreting that agreement

to remain in effect when it had in fact terminated, and when the arbitration

agreement expressly provided that the arbitrator was without authority to change

the contract. (Id. at pp. 287-290.) This case is in harmony with the basic

principles set forth in the pre-1961 decisions that while “ ‘every presumption is in

favor of the [arbitration] award [citation] and mere unsound reasoning by an

arbitrator in reaching a conclusion within the scope of proper arbitration will not

invalidate the result [citation]’ ” (Firestone Tire & Rubber Co. v. United Rubber

Workers (1959) 168 Cal.App.2d 444, 449), arbitrators exceed their powers when

they ignore “clear and unambiguous” contractual language (id. at pp. 448-449; see

also Drake v. Stein (1953) 116 Cal.App.2d 779, 785). These principles are a far

cry from the majority’s holding that parties may structure their arbitration

agreements in such a way as to require courts to review de novo an arbitrator’s

10

legal determinations, without any deference to the arbitrator, even when the

arbitrator reasonably addresses novel legal questions.2

Arbitration was intended to be a relatively quick and inexpensive means of

resolving disputes, in part by making the arbitrator’s resolution binding and final.

(Moncharsh, supra, 3 Cal.4th at p. 9.) Although it is arguably the case that the

court went too far in emphasizing arbitral finality at the expense of obtaining a just

and reasonable result (see Moncharsh, supra, 3 Cal.4th at p. 33 (conc. & dis. opn.

of Kennard, J.)), the majority goes too far in the opposite direction. The majority

decision would allow parties to fundamentally refashion arbitration from being a

means of binding dispute resolution to being essentially a preliminary fact-finding

procedure, with trial and appellate courts required to settle decisive legal

questions. The majority believes this change to be for the good. (Maj. opn., ante,

at pp. 32-34.) Whether or not this is so is open to question. Arguably this rule


2

The Arbitration Study also cites Utah Const. Co. v. Western Pac. Ry. Co.

(1916) 174 Cal. 156 (Utah Construction) for the proposition that “Arbitrators may
base their decision upon broad principles of justice and equity, but if the
submission agreement specifically requires an arbitrator to act in conformity with
rules of law, the arbitrator exceeds his authority if his decision is not based on
rules of law.” (Arbitration Study, supra, 3 Cal. Law Revision Com. Rep. at
p. G-56, fns. omitted; see id., fn. 168.) Utah Construction, which predated the
modernization of arbitration with the 1927 statute, contemplates a more expansive
notion of judicial review that most post-1927 cases have rejected. (See
Moncharsh, supra, 3 Cal.4th at pp. 19-23.) In any case, even Utah Construction
did not decide if the error of law in the case before it was grounds for vacating the
arbitration award, merely assuming that it would be and then finding no error.
(Utah Construction, supra, 174 Cal. at p. 163.) In the 90-plus years since this case
was decided, my research could find no court that has embraced Utah
Construction
’s dictum and overturned an arbitration award after undertaking
full-scale de novo judicial review, even when the error was not clear from the face
of the award. There is no indication the Commission or the Legislature intended
to incorporate this expansive reading of Utah Construction or to extend it to
include situations in which arbitrators reasonably decide unsettled questions of
law.

11

will burden the courts with the minutiae of arbitration disputes, thereby negating

whatever benefits arbitration may have had in conserving judicial resources. Nor

is it clear that this refashioning will stop at reviewing for legal error — will parties

be able to bind courts to review mixed questions of law and fact, or whether the

arbitration award is based on substantial evidence? But one thing seems certain:

the majority holding recreates arbitration in a way the Legislature could not have

envisioned. Because arbitration in this state has long ago ceased to be governed

by common law and is now wholly a creature of statute (see Moncharsh, supra, 3

Cal.4th at pp. 17-20), it is for the Legislature, not this court, to inaugurate such a

fundamental change in the nature of arbitration.

It is understandable that parties resorting to arbitration would not wish to

entirely relinquish judicial review and would seek protection from wholly arbitrary

arbitrators. As discussed, the CAA permits parties to clearly define the limits to

an arbitrator’s powers, and in so doing to obtain some measure of judicial review.

Certainly such agreements would require courts to vacate clear errors appearing on

the face of an arbitration award that cause substantial prejudice. (Cf. Moncharsh,

supra, 3 Cal.4th at p. 33 (conc. & dis. opn. of Kennard, J.).) Moreover, nothing

prevents parties from contracting to engage in nonbinding factfinding/dispute

resolution proceedings outside the scope of the CAA designed to facilitate

settlement of litigation. Nor are parties prevented from agreeing to have

arbitration awards reviewed by appellate arbitration panels. But it seems quite

clear the statute does not permit review of ordinary legal error, when an arbitrator

has acted reasonably in addressing the legal questions before him or her. The

object of an agreement requiring de novo judicial review is not to constrain the

unreasonable exercise of the arbitrator’s power, as is permitted by statute, but to

12

conscript courts to serve as appellate arbitration tribunals, with all the attendant

costs and burdens. The parties are without power under the statute to do so.3

II.

Turning to the present case, in reviewing the present award, “every

intendment of validity must be given the award and . . . the burden is upon the one

claiming error to support his contention.” (Crofoot, supra, 119 Cal.App.2d at

p. 185.) Here, DIRECTV fails to carry its burden. A majority of the arbitrators

below came to essentially two conclusions. First, that the arbitration agreement

was silent on whether classwide arbitration was permitted. Second, that under

California law, an arbitration agreement silent on classwide arbitration permits

such arbitration. As to the first question, given the lack of a specific provision

concerning classwide arbitration, the arbitrators’ conclusion is reasonable.

The second question of whether an arbitration agreement silent on

classwide arbitration permits such arbitration has not been squarely addressed by

this court or other appellate courts of this state. To be sure, classwide arbitration

is available when to deny it would be unconscionable (Discover Bank v. Superior

Court (2005) 36 Cal.4th 148, 163) or contrary to public policy (Gentry v. Superior

Court (2007) 42 Cal.4th 443, 463; see also Keating v. Superior Court (1982) 31

Cal.3d 584, 613 [classwide arbitration must be granted when to deny it in the

context of an arbitration contract of adhesion would result in “gross unfairness”].)

The parties here have not claimed unconscionability or violation of public policy.

Even so, without deciding questions not before us, the rule that a contract silent on

classwide arbitration will be interpreted to allow such arbitration is not contrary to


3

I note that this is not a case in which more rigorous judicial review is

necessary to enable a party to vindicate an unwaivable statutory right. (See
Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83,
106-107.)

13

any settled law or legal principle in the state, nor to any settled rule of the FAA.

In fact, California contract law is replete with interpretive presumptions grounded

in public policy that permit certain contractual outcomes only when they are

clearly expressed. (See, e.g., Crawford v. Weather Shield, Mfg., Inc. (2008) 44

Cal.4th 543, 552-553 [noninsurance indemnity agreements construed strictly

against party seeking to be indemnified against its own negligence]; MacKinnon v.

Truck Ins. Exchange (2003) 31 Cal.4th 635, 648 [exclusionary clauses in

insurance contracts interpreted narrowly against the insurer]; Nunes Turfgrass,

Inc. v. Vaughan-Jacklin Seed Co. (1988) 200 Cal.App.3d 1518, 1538 [contractual

clauses in nonadhesion contract that seek to limit liability will be strictly

construed].) Indeed, in the present case the majority opinion proposes a rule that

an agreement regarding expanded judicial review of arbitration awards must be

clear on its face. (See maj. opn., ante, at p. 29.) Whether there should be a rule

that even when it would not be unconscionable to prohibit class arbitration, such

arbitration would be prohibited only if the prohibition is clearly expressed, is an

unresolved question, and the arbitral majority’s answer in the affirmative is

reasonable.

The majority does not conclude otherwise. It does not hold that the

arbitrators’ judgment that classwide arbitration is potentially available under this

agreement is incorrect.4 Rather, it finds fault with some of the arbitrators’

reasoning regarding their reading of the American Arbitration Association rules

and with their interpretation of case law. Yet “[i]t is well settled that ‘arbitrators

do not exceed their powers merely because they assign an erroneous reason for

their decision.’ ” (Moncharsh, supra, 3 Cal.4th at p. 28.) Moreover, even if full-


4 Of course, the arbitrators decided only that classwide arbitration is potentially
available under the agreement, and have not yet decided whether such arbitration
is appropriate in the present case.

14

blown judicial review were available, akin to appellate review of trial court

decisions, “[t]here is perhaps no rule of review more firmly established than the

principle that a ruling or decision correct in law will not be disturbed on appeal

merely because it was given for the wrong reason. If correct upon any theory of

law applicable to the case, the judgment will be sustained regardless of the

considerations that moved the lower court to its conclusion.” (Belair v. Riverside

County Flood Control Dist. (1988) 47 Cal.3d 550, 568.) That rule must apply

with equal or greater force to judicial review, to the extent it is available, of

arbitration awards. Whether or not the arbitrators’ decision contained faulty legal

reasoning, the conclusion that the agreement is silent on class arbitration and that a

silent agreement will permit such arbitration if otherwise appropriate is not clearly

erroneous under California law or the FAA. I would therefore affirm the judgment

of the Court of Appeal directing the trial court to confirm the arbitration award.

MORENO, J.

I CONCUR:

GEORGE, C. J.



15



See next page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Cable Connection, Inc. v. DIRECTV, Inc.
__________________________________________________________________________________

Unpublished Opinion

Original Appeal
Original Proceeding
Review Granted
XXX 143 Cal.App.4th 207
Rehearing Granted

__________________________________________________________________________________

Opinion No.
S147767
Date Filed: August 25, 2008
__________________________________________________________________________________

Court:
Superior
County: Los Angeles
Judge: Judith C. Chirlin

__________________________________________________________________________________

Attorneys for Appellant:

Beatie and Osborn and Daniel A. Osborn for Plaintiffs and Appellants.




__________________________________________________________________________________

Attorneys for Respondent:

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

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









Counsel who argued in Supreme Court (not intended for publication with opinion):

Daniel A. Osborn
Beatie and Osborn
521 Fifth Avenue, 34th Floor
New York, NY 10175
(212) 888-9000

Michael E. Baumann
Kirkland & Ellis
777 South Figueroa Street
Los Angeles, CA 90017
(213) 680-8400


Petition for review after the Court of Appeal reversed a judgment vacating an arbitration award. This case includes the following issue: May the parties to a commercial arbitration agreement contractually expand the jurisdiction of the trial court to permit review of an arbitration award for legal error?

Opinion Information
Date:Citation:Docket Number:Category:Status:
Mon, 08/25/200844 Cal. 4th 1334, 190 P.3d 586, 82 Cal. Rptr. 3d 229S147767Review - Civil Appealclosed; remittitur issued

Parties
1Directv, Inc. (Defendant and Respondent)
Represented by Michael E. Baumann
Kirkland & Ellis
777 S. Figueroa Street, Suite 3700
Los Angeles, CA

2Directv, Inc. (Defendant and Respondent)
Represented by Margaret Anne Grignon
Reed Smith, LLP
1901 Avenue of the Stars, Suite 700
Los Angeles, CA

3Cable Connection, Inc. (Plaintiff and Appellant)
Represented by Daniel Adam Osborn
Beatie & Osborn, LLP
521 Fifth Avenue, 34th Floor
New York, NY

4L.F.P., Inc. (Amicus curiae)
Represented by Jeremy Brooks Rosen
Horvitz & Levy, LLP
15760 Ventura Boulevard, Suite 1800
Encino, CA


Opinion Authors
OpinionJustice Carol A. Corrigan
ConcurJustice Marvin R. Baxter
DissentJustice Carlos R. Moreno

Disposition
Aug 25 2008Opinion: Reversed

Dockets
Nov 1 2006Petition for review filed
  Respondent DirecTV, Inc. Attorneys Michael E. Baumann & Margaret A. Grignon
Nov 3 2006Received Court of Appeal record
 
Nov 21 2006Answer to petition for review filed
  Cabel Connection, Inc., et al., Plaintiffs and Respondents. Daniel A. Osborn, counsel
Dec 1 2006Reply to answer to petition filed
  Respondent DirecTV, Inc. Attorneys Michael E. Baumann & Margaret A. Grignon
Dec 20 2006Petition for review granted (civil case)
  Votes: George, C. J., Kennard, Baxter, Chin, Moreno and Corrigan, JJ.
Dec 20 2006Letter sent to:
  Counsel w/"Certification of Interested Entities or Persons" form. Form to be completed and returned within 15 days from today.
Jan 4 2007Certification of interested entities or persons filed
  Respondent DirecTV, Inc. Attorney Michael E. Baumann
Jan 5 2007Certification of interested entities or persons filed
  Cable Connection, Inc. et al., Plaintiffs and Appellants. Daniel A. Osborn, counsel
Jan 19 2007Opening brief on the merits filed
  Respondent DirecTV, Inc. Attorneys Michael E. Baumann and Margaret A. Grignon
Feb 13 2007Request for extension of time filed
  Atty Daniel Osborn counsel for Cable Connection, Inc., TV Options, Inc., Swartzel Electric and Orbital Satellite, Inc., Plaintiffs and Appellants requesting to March 20 to file answer brief on the merits (to court for permission)
Feb 15 2007Extension of time granted
  On application of appellants and good cause appearing, it is ordered that the time to serve and file the answer brief on the merits is extended to and including March 20, 2007.
Mar 21 2007Answer brief on the merits filed
  Cable Connection, Inc., et al., Plaintiffs and Appellants. Daniel A. Osborn, counsel (CRC, rule 8.25)
Apr 10 2007Reply brief filed (case fully briefed)
  Respondent DirectTV, Inc. Attorneys Michael E. Baumann and Margaret A. Grignon
Apr 12 2007Request for extension of time filed
  Attorney Jeremy Rosen counsel for amicus curiae L.F.P., Inc., requesting to June 9 to file the amicus curiae brief. (to court for permission)
Apr 18 2007Extension of time granted
  On application of amicus curiae L.F.P., Inc., and good cause appearing, it is ordered that the time to serve and file the amicus curiae brief is extended to and including June 9, 2007.
Jun 11 2007Received application to file Amicus Curiae Brief
  L.F.P., Inc., in support of Directv, Inc. Jeremy B. Rosen, counsel (to court for permission to file)
Jun 13 2007Permission to file amicus curiae brief granted
  The application of L.F.P., Inc., for permission to file an amicus curiae brief in support of respondent DIRECTV, Inc., is hereby granted. An answer thereto may be served and filed by any party within twenty days of the filing of the brief.
Jun 13 2007Amicus curiae brief filed
  L.F.P., Inc, in support of respondent DIRECTV, Inc. Jeremy B. Rosen, counsel
Jan 3 2008Case ordered on calendar
  to be argued on Wednesday, February 6, 2008, at 9:00 a.m., in Sacramento
Feb 6 2008Cause argued and submitted
 
Mar 26 2008Received:
  Supplemental Certificate of Interested Entities or Persons from Shaun Paisley counsel for DIRECTV, Defendant and Respondent
Apr 9 2008Submission vacated
 
Apr 9 2008Supplemental briefing ordered
  Submission of this matter is vacated, for the purpose of obtaining briefing on the effect of the United States Supreme Court's decision in Hall Street Associates, LLC v. Mattel, Inc. (March 25, 2008, 06-989) __U.S.__ [2008 WL 762537]. The Court requests supplemental briefing on other issues as well. The matter will be deemed resubmitted upon filing of the supplemental reply briefs. (See Cal. Rules of Court, rule 8.524(h).) The parties are directed to serve and file, in the San Francisco office of the court, simultaneous supplemental letter briefs addressing the following questions on or before May 9, 2008. The parties may serve and file simultaneous letter reply briefs on or before May 30, 2008. 1. In view of the specification in the parties' contract that "any arbitration conducted hereunder shall be governed by the United States Arbitration Act," are the proceedings for judicial review of the arbitration award governed by the Federal Arbitration Act, or the California Arbitration Act? 2. If the California act applies, how should the Hall Street decision affect the court's determination of whether a contract provision for review of legal error is enforceable? 3. If review for legal error is permissible, did the arbitrators violate the AAA rule against "consider[ing] the existence of these Supplementary Rules, or any other AAA rules, to be a factor either in favor of or against permitting the arbitration to proceed on a class basis," as DIRECTV argued for the first time in this court in its reply brief? (AAA, Supplementary Rules for Class Arbitrations (Oct. 2003) rule 3.)
May 9 2008Supplemental brief filed
  DIRECTV, Inc., Defendant and Respondent Michael Baumann, counsel
May 12 2008Supplemental brief filed
  Cable Connection, Inc. et al., Plaintiffs and Appellants. Daniel A. Osborn, counsel (CRC, rule 8.25(b) - FedEx)
May 30 2008Supplemental brief filed
  letter reply brief in response to Cable Connection's supplemental letter brief from DIRECTV, Inc., Defendant and Respondent, Michael Baumann, counsel
Jun 2 2008Submitted by order
  (per nunc pro tunc order filed 8/25/08)
Jun 2 2008Supplemental brief filed
  letter reply brief, dated 5/30/08, in response to respondent Direct TV Inc's supplemental letter brief Daniel A. Osborn, counsel for appellants Cable Connection Inc. et al. (via FedEx 5/30/08)
Aug 22 2008Notice of forthcoming opinion posted
 
Aug 25 2008Opinion filed: Judgment reversed
  with directions to instruct the trial court to vacate the award so that the arbitrators may redetermine whether the arbitration may proceed on a classwide basis. Majority Opinion by Corrigan, J. ----- joined by Kennard, Baxter, Werdegar and Chin, JJ. Concurring Opinion by Baxter, J. Concurring and Dissenting Opinion by Moreno, J. ----- joined by George, C.J.
Aug 25 2008Order filed
  Case ordered submitted. This order is to be filed nunc pro tunc as of June 2, 2008.
Sep 25 2008Remittitur issued (civil case)
 
Sep 26 2008Returned record
  to 2DCA (1 doghouse)
Oct 2 2008Received:
  Receipt for Remittitur

Briefs
Jan 19 2007Opening brief on the merits filed
 
Mar 21 2007Answer brief on the merits filed
 
Apr 10 2007Reply brief filed (case fully briefed)
 
Jun 13 2007Amicus curiae brief filed
 
If you'd like to submit a brief document to be included for this opinion, please submit an e-mail to the SCOCAL website
May 3, 2011
Annotated by john williams

Facts and Procedural Posture

This case involves a 2001 dispute between satellite television provider DIRECTV and its retail dealers who provide DIRECTV’s customers with equipment needed to receive its satellite signal. The dealers claimed that DIRECTV improperly withheld commissions and assessed improper charges. In the contract between DIRECTV and the dealers, 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.”

The dealers first brought the case in Oklahoma state court as a purported class action, but the case was quickly referred to Los Angeles for arbitration because the parties’ agreement had an arbitration clause. The arbitrators decided, in a 2-1 vote, that the parties’ agreement, though silent on the topic, did permit classwide arbitration. DIRECTV petitioned the California Superior Court to vacate the decision, arguing that the arbitrators committed errors of law and had thereby exceeded the powers granted them by the parties’ agreement. The trial court vacated the arbitration award, but the California Court of Appeal held that the parties may not contractually elect to expand the scope of judicial review for arbitration awards, and reversed the superior court.

Disposition

The decision of the Court of Appeals was reversed and the Court instructed the trial court to vacate the award so that the arbitrators may redetermine whether the arbitration may proceed on a classwide basis.

Issues

(1) May parties structure an agreement to allow for judicial review of legal error in the arbitration award?

(2) Is classwide arbitration available under an agreement is silent on the matter?

Holdings

(1) Judicial review of the merits of an arbitration award is permissible where the contracting parties have expressly agreed beforehand that any arbitration award would be reviewable for legal errors.

(2) This issue was left unresolved and remanded to permit the arbitrators to reconsider the issue, in light of several errors in legal reasoning noted by the Court.

Reasoning

Issue #1: Contract Provisions Permit Judicial Review

State and Federal Statutes

The California Arbitration Act (CAA) and the Federal Arbitration Act (FAA) provide only limited grounds for judicial review of an arbitration award. Specifically, courts are authorized to vacate an award if it was (1) procured by corruption, fraud, or undue means; (2) issued by corrupt arbitrators; (3) affected by prejudicial misconduct on the part of the arbitrators; or (4) in excess of the arbitrators’ powers. CODE CIV. PROC. CODE § 1286.2(a); 9 U.S.C. § 10(a) (2006). An award may be corrected for (1) evident miscalculation or mistake; (2) excess of the arbitrators’ powers; or (3) imperfection in form. CODE CIV. PROC CODE § 1286.6; 9 U.S.C. § 11 (2006).

In Moncharsh v. Heily & Blase, 832 P.2d 899 (Cal. 1992), the California Supreme Court declared “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.”

Federal Preemption

In March of 2008, in Hall St. Assocs., L.L.C. v. Mattel, Inc., the United States Supreme Court held that the FAA does not permit agreements to expand the scope of judicial review of arbitration awards. 552 U.S. 576, 584 (2008). But, the United States Supreme Court went on to say that the FAA does not “exclude more searching review based on authority outside the [FAA].” Id. at 590. As the Court in Hall Street explained: the parties involved in arbitration “may contemplate [judicial] enforcement under state statutory or common law, for example, where judicial review of different scope is arguable.” Id. The California Supreme Court relied on language from Hall Street to conclude that Hall Street was restricted to proceedings to review arbitration awards under the FAA and did not require state law to conform to its limitations.

The FAA governs arbitration clauses in contracts involving interstate commerce, like the one at issue in this case, and 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 the FAA, and are, therefore, preempted. However, the United States Supreme Court does not read the FAA’s procedural provisions to not apply to state court proceedings. As the FAA itself instructs, 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.” 9 U.S.C. §§ 10(a), 11 (2006).

In this case, the California Supreme Court found that the United States Supreme Court did not intend to “declare a policy with preemptive effect in all cases involving instate commerce.” Relying on this conclusion the Court held that because Hall Street left open avenues for judicial review of arbitration awards independent of the FAA, federal law did not preempt judicial review.

Moncharsh and the California Rule

In Moncharsh, the California Supreme Court held that “an arbitrator’s decision is not ordinarily reviewable for error by either the trial or appellate courts.” 832 P.2d at 832. However, in Moncharsh, the parties’ arbitration clause did not include a provision expanding the scope of judicial review. And importantly, Moncharsh began from the premise that the “scope of arbitration is . . . a matter of agreement between the parties’”, and the “powers of an arbitrator are limited and circumscribed by the agreement or stipulation of submission.” Id. at 902.

Here, the California Supreme Court held that “contractual limitations may alter the usual scope of [judicial] review” of arbitration awards. The Court reasoned that the parties’ intent should be given considerable weight especially when considering that the CAA provides that the arbitrators may not “exceed[] their powers.” CAL. CIV. PROC. CODE § 1286.2(a)(4).

In addition to supporting its holding with statutes and case law, the Court also explained the advantageous policy implications of its holding. First, the Court noted that the development of alternative dispute resolution is advanced by enabling private parties to choose procedures with which they are comfortable. Second, enforcing contract provisions for review of awards on the merits relieves pressure on congested trial court dockets. Finally, there are significant benefits to the development of common law when arbitration awards are made subject to merits review by the parties’ agreement since the expansion of judicial review gives the courts of first instance the opportunity to establish a record, and to include the reasoning of expert arbitrators into the body of the law in the form of written decisions.

Issue # 2: The Award Permitting Classwide Arbitration

On the issue of whether the terms of the arbitration clause are consistent with conducting arbitration on a classwide basis, the Court remanded the issue to permit the arbitration panel to reconsider the issue. The Court took this approach because it found that the reasoning of the arbitrators and the Court of Appeal suffered from several lapses.

First, the Court found that the arbitrators and the Court of Appeal misapplied the Keating rule which explains when courts have the authority to order classwide arbitration. Second, the Court found the arbitrators should have looked to the American Arbitration Association (AAA) rules to determine if they had the power to order classwide arbitration—not the Keating rule. Third, in making the classwide arbitration determination, the arbitrators should not have considered any other AAA rules, to be a factor either in favor of or against permitting the arbitration to proceed on a class basis.

Concurrence

Justice Baxter agreed that judicial review of the merits of an arbitration award is permissible, where, as here, the contracting parties have expressly agreed that the arbitrators have no power to commit errors of law and that the award may be vacated or corrected on appeal for legal error.

Justice Baxter noted that parties to an arbitration agreement may not contractually secure an arbitrary method of review. In particular, he noted that parties proceeding under the CAA may only obtain judicial review of “awards” within the meaning of the CAA and that he reserves judgment on whether agreements can provide for fragmented review of the individual issues that are part and parcel of the arbitrable controversy.

Dissent

Justice Moreno disagreed with the majority to the extent that it permits parties to obligate courts to undertake full-scale judicial review of legal error in arbitration awards. Specifically, Justice Moreno argues that the statutes only permit a court to vacate an award when the arbitrator, in addressing legal questions, has acted arbitrarily and unreasonably (i.e., the arbitrator’s answer to a legal question is clearly erroneous).

Key Related Statutes and Cases

CAL. CIV. PROC. CODE § 1286.2.
http://www.leginfo.ca.gov/cgi-bin/displaycode?section=ccp&group=01001-02...

9 U.S.C. § 2.
http://www.law.cornell.edu/uscode/html/uscode09/usc_sec_09_00000002----0...

9 U.S.C. § 10.
http://www.law.cornell.edu/uscode/html/uscode09/usc_sec_09_00000010----0...

9 U.S.C. § 11.
http://www.law.cornell.edu/uscode/html/uscode09/usc_sec_09_00000011----0...

Moncharsh v. Heily & Blase, 832 P.2d 899 (Cal. 1992).
http://scholar.google.com/scholar_case?q=832+P.2d+899+&hl=en&as_sdt=2,5&...

Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).
http://scholar.google.com/scholar_case?q=552+U.S.+576&hl=en&as_sdt=2,5&c...

Keating v. Superior Court, 645 P.2d 1192 (Cal. 1982).
http://scholar.google.com/scholar_case?q=31+cal.3d+584&hl=en&as_sdt=2,5&...

AAA, Supplementary Rules for Class Arbitrations, Rule 3.
http://www.adr.org/sp.asp?id=21936

Tags:

Judicial review of arbitration, arbitration, arbitration agreements, employment contract, preemption, classwide arbitration, Cable Connection, DIRECTV

By John Williams

Jan 9, 2009
Annotated by diana teasland

Written by Crystal Perl

Summary of Facts
• Plaintiffs were DIRECTTV dealers, selling and installing
DIRECTTV services.
• Plaintiffs sue DIRECTTV in Oklahoma claiming DIRECTTV wrongfully
withheld commissions and assessed "chargebacks".
• Oklahoma court directed dealers to file a demand for arbitration in
California state court.
• Dealers filed a statement of claim and demand for class-wide
arbitration with the AAA (American Arbitration Association)
• AAA issued an award finding that the arbitration clause in the parties'
contracts did not prohibit class-wide arbitration
• DIRECTTV files a trial court petition requesting the arbitration award
be vacated.

Final Actions
The Supreme Court of California remands to permit the arbitration panel to
reconsider the possibility of class-wide arbitration as a matter of contract
interpretation and AAA arbitration procedure.