Supreme Court of California Justia
Docket No. S116288
Cronus Invest. v. Concierge Serv.


Filed 3/10/05

IN THE SUPREME COURT OF CALIFORNIA

CRONUS INVESTMENTS, INC.,
Plaintiff,
Cross-defendant
and
Appellant; )
S116288
HOWARD JON COLMAN,
Ct.App. 2/4 B159591
Cross-defendant
and
Appellant, )
Los Angeles County
v.
Super. Ct. No. LC060095
CONCIERGE SERVICES,
Defendant,
Cross-complainant
and
Respondents; )
WESTREC MARINA MANAGEMENT, )
INC., et al.,
Defendants and Respondents. )

Code of Civil Procedure section 1281.2, subdivision (c)1 permits a trial
court, under specified circumstances, to stay arbitration pending the outcome of
related litigation. In Volt Information Sciences, Inc. v. Board of Trustees of
Leland Stanford Junior Univ. (1989) 489 U.S. 468 (Volt), the United States

1
Except as otherwise noted, all further statutory references are to the Code
of Civil Procedure.
1



Supreme Court held that the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et. seq.,
which applies to and favors the enforcement of arbitration agreements affecting
interstate commerce, does not preempt the application of section 1281.2,
subdivision (c) where the parties had agreed that their arbitration agreement would
be governed by the law of California. In this case, the parties agreed that their
arbitration agreement would be governed by California law, but they further
agreed that the designation of California law “shall not be deemed an election to
preclude application of the [FAA], if it would be applicable.” As explained
below, we conclude that, in this situation, the FAA also does not preempt the
application of section 1281.2, subdivision (c).
FACTS AND PROCEDURAL HISTORY
In July 2000, Howard Colman transferred a home-management business,
Dew-All Services, Inc. (Dew-All), to a newly created company, Concierge
Services, LLC (Concierge). Cronus Investments, Inc. (Cronus), which is wholly
owned by Colman, has a 20 percent interest in Concierge, while Westrec Marina
Management, Inc. (Westrec) owns the remaining interest. The transactions
involved six agreements: (1) a limited liability company (LLC) agreement
between Cronus and Westrec, which created Concierge; (2) a stock purchase
agreement by which Concierge bought the stock in Colman’s preexisting
company, Dew-All; (3) an employment agreement by which Concierge employed
Colman as its president; (4) a covenant not to compete and confidentiality
agreement between Colman and Concierge; (5) a consulting agreement between
Cronus and Concierge; and (6) a guaranty agreement executed by Westrec of a
promissory note payable by Concierge to Colman.
2

Four of the six agreements provide for the arbitration of any disputes
between the parties “arising out of, in connection with, or in relation to the
interpretation, performance or breach of this Agreement . . . .”2 The arbitration
clause further specifies that: “The designation of a situs or specifically a governing
law for this agreement or the arbitration shall not be deemed an election to
preclude application of the [FAA], if it would be applicable.”3 The agreements
also contained a choice-of-law clause providing that: “[t]his agreement shall be
construed and enforced in accordance with and governed by the laws of the State
of California, without giving effect to the conflict of laws provisions thereof.”
Problems arose after the execution of the agreements, resulting in Colman’s
discharge from his employment with Concierge. On March 19, 2002, Cronus sued
Concierge, Westrec, Westrec Contracting, LLC (an affiliate of Westrec), Michael
M. Sachs (chief executive officer of Westrec), and William W. Anderson and
Michael P. Robbins (principals in Westrec). The complaint asserted claims for
breach of contract, breach of fiduciary duty, conversion and fraud. After Cronus

2
The LLC and guaranty agreements did not contain arbitration provisions.
3
The arbitration clause read in full as follows:
“9.10. Arbitration
“(a) Agreement to Arbitrate. Any controversy, dispute or claim arising out
of, in connection with, or in relation to the interpretation, performance or breach
of this Agreement, including any claim based on contract, tort or statute, shall be
settled, at the request of either party, by arbitration conducted in Los Angeles,
California in accordance with the then existing Rules for Commercial Arbitration
of the American Arbitration Association (‘AAA’), and judgment upon any award
rendered by the arbitrator may be entered by any State or Federal court having
jurisdiction thereof. Any controversy concerning whether a dispute is an
arbitrable dispute shall be determined by the arbitrator. The parties intend that this
agreement to arbitrate be valid, specifically enforceable and irrevocable. The
designation of a situs or specifically a governing law for this agreement or the
arbitration shall not be deemed an election to preclude application of the [FAA], if
it would be applicable.”
3



filed its complaint, Colman and Cronus submitted a demand for arbitration to the
American Arbitration Association (AAA) under the arbitration clauses in the
underlying agreements.
Concierge then filed a cross-complaint against Colman, Cronus, Nelson
Colman (Colman’s father), and Desert Home Services, Inc. (Desert), which is
operated by Nelson Colman. The cross-complaint asserted claims for breach of
contract, fiduciary fraud, unjust enrichment, and inducement of breach of contract.
It alleged that Colman and Cronus improperly diverted business from Concierge to
Colman’s father and Desert.
Colman and Cronus then petitioned the superior court, under sections
1281.2 and 1281.4, to stay the litigation and compel arbitration, contending that
they had already demanded arbitration and that some of the cross-claims
implicated agreements containing an arbitration clause.
Defendants, in turn, moved to stay the arbitration pending the outcome of
litigation and to consolidate the arbitration proceeding with the underlying action
under section 1281.2, subdivision (c) (section 1281.2 (c)). The trial court
determined that: (1) some of the causes of action and controversies in the
underlying action were not subject to arbitration; (2) only three of the eight cross-
claims were arbitrable; (3) some of the litigants were not parties to agreements
containing an arbitration agreement; and (4) the lawsuit and arbitration
proceedings contained overlapping issues of fact and law. To avoid the possibility
of contradictory outcomes and promote efficiency in the resolution of disputes, the
court denied the petition to stay litigation and compel arbitration, granted the
motion to stay the arbitration proceedings pending outcome of the litigation, and
consolidated the three arbitrable cross-claims with the action “for all purposes.”
The Court of Appeal affirmed the trial court’s ruling. First, as a matter of
contract interpretation, the Court of Appeal found that the “not. . . preclude”
4

language of the arbitration clause superseded the broader and more general choice-
of-law provision and concluded that the parties intended that the FAA apply to the
“fullest extent” and “without limitation” in those contracts containing arbitration
agreements. Second, the Court of Appeal analogized a trial court’s authority to
stay arbitration proceedings (§ 1281.2(c)) to a court’s authority to stay lawsuits
when resolving problems of multiple litigation (§ 526, subd. (a)(6)) and found that
section 1281.2(c) is a neutral law derived from equitable principles applicable to
all contracts. The court thus determined that, because section 1281.2(c) on its face
is “an evenhanded application of state principles addressing the general problem
of multiple litigation,” the FAA does not preempt its application.
In their petition for review, plaintiff Cronus and cross-defendant Colman
(hereafter appellants) claim that the Court of Appeal erred in concluding that the
FAA does not preempt the application of section 1281.2(c). Defendants (hereafter
respondents) filed an answer to the petition, requesting that we determine whether
the parties intended to incorporate section 1281.2(c) into the arbitration
agreements and whether the FAA’s procedural rules apply in California courts.
Without limiting the issues, we granted review to determine, in this case, whether
the FAA preempts the application of section 1281.2(c).
DISCUSSION
Section 1281.2(c) requires a court to order arbitration upon petition by one
of the parties to an arbitration agreement, “unless [the court] determines that:[¶]
. . .[¶] (c) A party to the arbitration agreement is also a party to a pending court
action . . . with a third party, arising out of the same transaction or series of related
transactions and there is a possibility of conflicting rulings on a common issue of
law or fact.” If the court makes such a determination, it:
“(1) may refuse to enforce the arbitration agreement and may order
intervention or joinder of all parties in a single action . . . ; (2) may order
5

intervention or joinder as to all or only certain issues; (3) may order arbitration
among the parties who have agreed to arbitration and stay the pending court action
. . . pending the outcome of the arbitration proceeding; or (4) may stay arbitration
pending the outcome of the court action . . . .”
The parties do not dispute that this case comes within the exception to the
general rule of arbitration enforcement specified in section 1281.2(c). Three of the
10 parties to the court action (Concierge, Colman, and Cronus) are parties to
arbitrable agreements and the arbitration proceeding. But, the other seven parties
to the court action (Westrec, Westrec Contracting, Sachs, Anderson, Robbins,
Nelson Colman, and Desert) are not parties to any arbitration agreement and thus
are not amenable to arbitration. None of the parties appear to dispute that many of
the claims in the lawsuit are nonarbitrable. On the other hand, the parties do
dispute whether they intended that section 1281.2(c) procedures would govern the
enforcement of those contracts that contain the arbitration provisions.
Under United States Supreme Court jurisprudence, we examine the
language of the contract to determine whether the parties intended to apply the
FAA to the exclusion of California procedural law and, if any ambiguity exists, to
determine whether section 1281.2(c) conflicts with or frustrates the objectives of
the FAA. We first examine the underlying purpose of and the rights created by
the FAA and the applicable preemption principles.
A. The FAA’s Purpose
In 1925, Congress passed the FAA to “overrule the judiciary’s longstanding
refusal to enforce agreements to arbitrate” and to place such agreements “ ‘upon
the same footing as other contracts, where it belongs.’[Citation.]” (Dean Witter
Reynolds Inc. v. Byrd (1985) 470 U.S. 213, 219-220) (Byrd)). The federal statute
rests on the authority of Congress to enact substantive rules under the commerce
6

clause, requiring courts to enforce arbitration agreements in contracts involving
interstate commerce. (Southland Corp. v. Keating (1984) 465 U.S. 1, 10-11
(Keating).) Here, the parties agree that the contracts at issue involve interstate
commerce and, thus, fall within the coverage of the FAA.
Section 2, the primary substantive provision of the FAA, provides: “A
written provision in any maritime transaction or a contract evidencing a
transaction involving commerce to settle by arbitration a controversy thereafter
arising . . . shall be valid, irrevocable, and enforceable, save upon such grounds as
exist at law or in equity for the revocation of any contract.” (9 U.S.C. §2.)
“Section 2 is a congressional declaration of a liberal federal policy favoring
arbitration agreements, notwithstanding any state substantive or procedural
policies to the contrary. The effect of the section is to create a body of federal
substantive law of arbitrability, applicable to any arbitration agreement within the
coverage of the Act.” (Moses H. Cone Memorial Hospital v. Mercury Constr.
Corp. (1983) 460 U.S. 1, 24 (Moses H. Cone).) Thus, the FAA “establishes that,
as a matter of federal law, any doubts concerning the scope of arbitrable issues
should be resolved in favor of arbitration, whether the problem at hand is the
construction of the contract language itself or an allegation of waiver, delay, or a
like defense to arbitrability.” (Moses H. Cone, supra, 460 U.S. at pp. 24-25.) The
policy of enforceability established by section 2 of the FAA is binding on state
courts as well as federal courts. (Rosenthal v. Great Western Fin. Securities Corp.
(1996) 14 Cal.4th 394, 405 (Rosenthal).)
However, the FAA’s purpose is not to provide special status for arbitration
agreements, but only “to make arbitration agreements as enforceable as other
contracts, but not more so.” (Prima Paint Corp. v. Flood & Conklin Mfg. Co.
(1967) 388 U.S. 395, 404, fn. 12.) In accord with this purpose, the high court has
stated that state contract rules generally govern the construction of arbitration
7

agreements. (See, e.g., Doctor’s Associates, Inc. v. Casarotto (1996) 517 U.S.
681, 685 (Doctor’s Associates) [“ ‘[s]tate law, whether of legislative or judicial
origin, is applicable if that law arose to govern issues concerning the validity,
revocability, and enforceability of contracts generally’ ”]; First Options of
Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, 944 [state law principles governing
formation of contracts generally apply in deciding arbitrability issue]; Allied-
Bruce Terminix Cos. v. Dobson (1995) 513 U.S. 265, 281 [“States may regulate
contracts, including arbitration clauses, under general contract law principles . . .
.”].) “[T]he federal policy is simply to ensure the enforceability, according to their
terms, of private agreements to arbitrate.” (Volt, supra, 489 U.S. at p. 476.) Thus,
the FAA does not force parties to arbitrate when they have not agreed to do so (see
Byrd, supra, 470 U.S. at pp. 219-220) or require them to do so under any specific
set of procedural rules (Volt, supra, 489 U.S. at pp. 476, 479). “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.” (Volt, supra,
489 U.S. at p. 479.)
B. Preemption
“The FAA contains no express pre-emptive provision, nor does it reflect a
congressional intent to occupy the entire field of arbitration. [Citation.] But even
when Congress has not completely displaced state regulation in an area, state law
may nonetheless be pre-empted to the extent that it actually conflicts with federal
law—that is, to the extent that it ‘stands as an obstacle to the accomplishment and
execution of the full purposes and objectives of Congress.’[Citation.]” (Volt,
supra, 489 U.S. at p. 477.)
8

To ensure that arbitration agreements are enforced according to their terms,
the FAA preempts all state laws that apply of their own force to limit those
agreements against the parties’ will or to withdraw the power to enforce them.
(See, e.g., Perry v. Thomas (1987) 482 U.S. 483, 490-491 [FAA preempted
California statute that rendered private agreements to arbitrate wage collection
claims unenforceable by requiring judicial forum for resolution of those claims];
Keating, supra, 465 U.S. at p. 16 & fn. 10 [FAA preempted California statute that
rendered agreements to arbitrate certain franchise claims unenforceable by
requiring judicial forum for resolution of those claims].) Although state law may
be applied to regulate contracts, including arbitration clauses, “ ‘if that law arose
to govern issues concerning the validity, revocability, and enforceability of
contracts generally,’[citation]” courts may not invalidate arbitration agreements
under state law contract principles applicable only to arbitration provisions, and
that therefore disfavor such contracts, or single them out for “suspect status.”
(Doctor’s Associates, supra, 517 U.S. at pp. 686-687.) For example, the high
court found that a Montana statute that made arbitration clauses unenforceable
unless the contract provided notice of the arbitration clause “ ‘in underlined capital
letters on the first page of the contract’ ” directly conflicted with the FAA; the
state law conditioned the enforceability of arbitration agreements on a notice
requirement not applicable to contracts generally. (Doctor’s Associates, supra,
517 U.S. at pp. 684, 687-688.) Only “generally applicable contract defenses, such
as fraud, duress, or unconscionability, may be applied to invalidate arbitration
agreements without contravening § 2” of the FAA. (Doctor’s Associates, supra,
517 U.S. at p. 687.)
In addition, the FAA establishes a prophylactic rule governing ambiguities
in arbitration clauses. Section 2 of the FAA (9 U.S.C. §2), applicable to any
arbitration agreement within the coverage of the Act, requires that “questions of
9

arbitrability . . . be addressed with a healthy regard for the federal policy favoring
arbitration.” (Moses H. Cone, supra, 460 U.S. at p. 24.) Any doubts or
ambiguities as to the scope of the arbitration clause itself should be resolved in
favor of arbitration. (Id. at pp. 24-25; see also Volt, supra, 489 U.S. at pp. 475-
476.)
C. Volt
Volt involved the application of section 1281.2(c) to a lawsuit with
interrelated arbitrable and nonarbitrable claims and parties who were not subject to
the arbitration agreement at issue. The underlying contract, which covered the
installation of an electrical system on the Stanford University campus, contained
an agreement to arbitrate all disputes between the parties “ ‘arising out of or
relating to this contract or the breach thereof.’ ” The contract also contained a
choice-of-law provision that the contract “ ‘shall be governed by the law of the
place where the Project is located,’ ” which was California. After disputes arose,
Volt demanded arbitration. Stanford, in turn, filed an action in the California
superior court against Volt and other companies involved in the construction
project with whom it did not have arbitration agreements. The trial court, ruling
on Stanford’s motion to stay the arbitration and Volt’s motion to compel
arbitration and stay the lawsuit, stayed the arbitration under section 1281.2(c).
(Volt, supra, 489 U.S. at pp. 470-471.)
The California Court of Appeal affirmed the trial court’s ruling, concluding
that the choice-of-law provision incorporated California’s rules of arbitration into
the contract. (Volt, supra, 489 U.S. at pp. 471-472.) After acknowledging that
“the interpretation of private contracts is ordinarily a question of state law, which
this Court does not sit to review,” the high court accepted the Court of Appeal’s
construction that the choice-of-law provision incorporated the state arbitration
10

laws, including section 1281.2(c). (Volt, supra, 489 U.S. at pp. 474-476.) The
court held that application of the California statute to stay arbitration would not
undermine the goals and policies of and is not preempted by the FAA in a case
where the parties have agreed that their arbitration agreement will be governed by
the law of California. (Volt, supra, 489 U.S. at pp. 470, 477-479.) “There is no
federal policy favoring arbitration under a certain set of procedural rules; the
federal policy is simply to ensure the enforceability, according to their terms, of
private agreements to arbitrate.” (Id. at p. 476.)
D. The Choice-of-law and Arbitration Clauses in This Case.
In this case, the choice-of-law clause provides that: “[t]his agreement shall
be construed and enforced in accordance with and governed by the laws of the
State of California, without giving effect to the conflict of laws provisions
thereof.” The parties seem to agree that the broad choice-of-law provision
generally incorporates California law, including the California Arbitration Act
(CAA) (§ 1280 et. seq.), of which section 1281.2(c) is a part.
Mount Diablo Medical Center v. Health Net of California, Inc. (2002) 101
Cal.App.4th 711 (Mount Diablo)—in which the choice-of-law provision was
similar to the one here—supports their interpretation. There, the court stated:
“The choice-of-law provision in the present case may be ‘generic’ in the sense that
it does not mention arbitration or any other specific issue that might become a
subject of controversy, but it is nonetheless broad, unqualified and all-
encompassing. It provides that ‘the validity, construction, interpretation and
enforcement of this Agreement’ shall be governed by California law. The explicit
reference to enforcement reasonably includes such matters as whether proceedings
to enforce the agreement shall occur in court or before an arbitrator. Chapter 2 (in
which § 1281.2 appears) of title 9 of part III of the California Code of Civil
11

Procedure is captioned ‘Enforcement of Arbitration Agreements.’ An
interpretation of the choice-of-law provision to exclude reference to this chapter
would be strained at best.” (Mount Diablo, supra, 101 Cal.App.4th at p. 722.)
Thus, we agree that the choice-of-law provision—which is substantially
similar to the provisions in Mount Diablo and Volt—incorporates California’s
rules of arbitration into the contract. However, the contracts at issue in Mount
Diablo and Volt did not contain the arbitration clause here, which states: “The
designation of a situs or specifically a governing law for this agreement or the
arbitration shall not be deemed an election to preclude application of the [FAA], if
it would be applicable.” The parties agree that, as specified in the arbitration
clause, the scope of the choice of law provision is “specifically limited by
applicable provisions of the FAA” and is nullified “only where the FAA’s
provisions are inconsistent with the CAA.” Respondents contend that the
procedural rules of section 1281.2(c) do not conflict with the FAA’s procedural
provisions—because they do not apply in state court—or with its substantive
provision (9 U.S.C. §2). Appellants respond that we need not determine whether
section 1281.2(c) conflicts with the procedural provisions of the FAA because
application of section 1281.2(c) would, nevertheless, contravene the substantive
goals and policies of the FAA. Because we disagree with appellant’s premise, we
first decide whether the procedural provisions of the FAA conflict with section
1281.2(c).
Section 3 of the FAA concerns the enforcement of arbitration agreements in
a pending lawsuit. It requires the “courts of the United States” to grant a party’s
request for a stay of litigation on an arbitrable issue, pending completion of the
12

arbitration. (9 U.S.C § 3.)4 Section 4 of the FAA concerns petitions for
enforcement of an arbitration agreement where one party refuses to arbitrate. It
requires a “United States district court” to entertain an application to compel
arbitration. (9 U.S.C § 4.)5

4
Section 3 of the FAA states: “If any suit or proceeding be brought in any of
the courts of the United States upon any issue referable to arbitration under an
agreement in writing for such arbitration, the court in which such suit is pending,
upon being satisfied that the issue involved in such suit or proceeding is referable
to arbitration under such an agreement, shall on application of one of the parties
stay the trial of the action until such arbitration has been had in accordance with
the terms of the agreement, providing the applicant for the stay is not in default in
proceeding with such arbitration.”
5
Section 4 of the FAA states: “A party aggrieved by the alleged failure,
neglect, or refusal of another to arbitrate under a written agreement for arbitration
may petition any United States district court which, save for such agreement,
would have jurisdiction under Title 28, in a civil action or in admiralty of the
subject matter of a suit arising out of the controversy between the parties, for an
order directing that such arbitration proceed in the manner provided for in such
agreement. Five days’ notice in writing of such application shall be served upon
the party in default. Service thereof shall be made in the manner provided by the
Federal Rules of Civil Procedure. The court shall hear the parties, and upon being
satisfied that the making of the agreement for arbitration or the failure to comply
therewith is not in issue, the court shall make an order directing the parties to
proceed to arbitration in accordance with the terms of the agreement. The hearing
and proceedings, under such agreement, shall be within the district in which the
petition for an order directing such arbitration is filed. If the making of the
arbitration agreement or the failure, neglect, or refusal to perform the same be in
issue, the court shall proceed summarily to the trial thereof. If no jury trial be
demanded by the party alleged to be in default, or if the matter in dispute is within
admiralty jurisdiction, the court shall hear and determine such issue. Where such
an issue is raised, the party alleged to be in default may, except in cases of
admiralty, on or before the return day of the notice of application, demand a jury
trial of such issue, and upon such demand the court shall make an order referring
the issue or issues to a jury in the manner provided by the Federal Rules of Civil
Procedure, or may specially call a jury for that purpose. If the jury find that no
agreement in writing for arbitration was made or that there is no default in
proceeding thereunder, the proceeding shall be dismissed. If the jury find that an
(Footnote continued on next page.)
13



The language used in sections 3 and 4 and the legislative history of the
FAA suggest that the sections were intended to apply only in federal court
proceedings. Section 4 refers to the “United States district court” and provides
that it can be invoked only in a court that has jurisdiction under title 28 of the
United States Code. (9 U.S.C. § 4.) This language indicates that Congress
intended to limit the application of the section to federal courts. “In 1954, as a
purely clerical change, Congress inserted ‘United States district court’ in § 4 as a
substitute for ‘court of the United States.’ [Act of Sept. 3, 1954, ch. 1263, § 19,
68 Stat. 1226, 1233.] Both House and Senate Reports explained: ‘ “United States
district court” was substituted for “court of the United States” because, among
Federal courts, such a proceeding would be brought only in a district court.’
H.R.Rep. No. 1981, 83d Cong., 2d Sess., 8 (1954); S.Rep. No. 2498, 83d Cong.,
2d Sess., 9 (1954).” (Keating, supra, 465 U.S. at p. 29, fn. 18 (dis. opn. of
O’Connor, J.).)
Although 9 United States Code section 3 is less clear, it would appear that
“courts of the United States” under section 3 means federal district courts, because
state courts are courts “in” but not “of” the United States as commonly designated
in federal law. (Keating, supra, 465 U.S. at p. 29, fn. 18 (dis. opn. of O’Connor,
J.).) Because sections 3 and 4 constitute part of the same enforcement scheme
under the FAA, the language in both sections should be interpreted consistently.
(Keating, supra, 465 U.S. at p. 29, fn. 17 (dis. opn. of O’Connor, J.) [“§ 3 applies
when the party resisting arbitration initiates the federal-court action; § 4 applies to

(Footnote continued from previous page.)

agreement for arbitration was made in writing and that there is a default in
proceeding thereunder, the court shall make an order summarily directing the
parties to proceed with the arbitration in accordance with the terms thereof.”
14



actions initiated by the party seeking to enforce an arbitration provision”].)
Moreover, before the minor amendment in section 4's phrasing, “[a]s originally
enacted, § 3 referred, in the same terms as § 4, to ‘courts [or court] of the United
States.’ ” (Keating, supra, 465 U.S. at p. 29 (dis. opn. of O’Connor, J.).) The
legislative history of the original enactment further suggests that sections 3 and 4
were intended to regulate federal procedures for the enforcement of arbitration
agreements.6 Thus, the identical phrasing in the FAA’s original procedural
provisions together with its legislative history reflects a congressional intent that
the two sections apply to federal courts.
Further, the United States Supreme Court does not read the FAA’s
procedural provisions to apply to state court proceedings. “[W]e do not hold that
§§ 3 and 4 of the Arbitration Act apply to proceedings in state courts. Section 4,
for example, provides that the Federal Rules of Civil Procedure apply in
proceedings to compel arbitration. The Federal Rules do not apply in such state
court proceedings.” (Keating, supra, 465 U.S. at p. 16, fn. 10.) In Volt, the high
court later confirmed that, “While we have held the FAA’s ‘substantive’
provisions—§§ 1 and 2—are applicable in state as well as federal court [citation],
we have never held that §§ 3 and 4, which by their terms appear to apply only to

6
The House of Representatives’ report on the FAA noted: “ ‘This bill
declares simply that such agreements for arbitration shall be enforced, and
provides a procedure in the Federal courts for their enforcement.’ H.R.Rep. No.
96, 68th Cong., 1st Sess., 1-2 (1924).” (Byrd, supra, 470 U.S. at p. 220, fn. 6.)
After the enactment of the FAA, the American Bar Association, which had
participated in drafting the legislation, stated that “[t]he statute establishes a
procedure in the Federal courts for the enforcement of arbitration agreements.[¶]
A Federal statute providing for the enforcement of arbitration agreements does
relate solely to procedure of the Federal courts.” (ABA Com. on Commerce,
Trade & Commercial Law (1925) The United States Arbitration Law and its
Application
, 11 A.B.A.J. 153, 154.)
15



proceedings in federal court [citations], are nonetheless applicable in state court.”
(Volt, supra, 489 U.S. at p. 477, fn. 6.) Reaffirming Volt’s distinction between the
procedural and substantive aspects of the FAA, the court further described section
1281.2(c) as “determin[ing] only the efficient order of proceedings [and] not
affect[ing] the enforceability of the arbitration agreement itself.” (Doctor’s
Associates, supra, 517 U.S at p. 688.)
Finally, our interpretation that the procedural provisions of the FAA and
section 1281.2 do not conflict is consistent with our prior decision in Rosenthal.
(Rosenthal, supra, 14 Cal.4th 394.) Rosenthal dealt with the differences between
the procedural provisions in section 4 of the FAA (9 U.S.C. § 4), designating that
a jury decides the existence and validity of an arbitration agreement, and sections
1281.2 and 1290.2, designating that a court decides that issue. We determined
that: (1) the wording of section 4 suggests it is limited to federal courts and (2) the
state procedural rules do not frustrate or defeat section 2’s policy of enforcement
of arbitration agreements. (Rosenthal, supra, 14 Cal.4th at pp. 407-410.) We
explained that: “[T]he federal policy of ensuring enforcement of private arbitration
agreements, centrally embodied in section 2, is not self-implementing; its
effectuation requires that courts have available some procedure by which a party
seeking arbitration may compel a resisting party to arbitrate. Section 4 of the
[FAA] establishes one such procedure; state law may or may not provide for other
equivalent or similar procedures.” (Rosenthal, supra, 14 Cal.4th at p. 408.) “Like
other federal procedural rules, therefore, ‘the procedural provisions of the [FAA]
are not binding on state courts . . . provided applicable state procedures do not
defeat the rights granted by Congress.’[Citation.]” (Rosenthal, supra, 14 Cal.4th
at p. 409.) “Our statutes do establish procedures for determining enforceability
not applicable to contracts generally, but they do not thereby run afoul of the
[FAA's] section 2, which states the principle of equal enforceability, but does not
16

dictate the procedures for determining enforceability.” (Rosenthal, supra, 14
Cal.4th at p. 410.)
Appellants rely on specific language in Volt and on the holdings of Byrd
and Moses H. Cone. Volt stated: “Where, as here, 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, even if the result is that
arbitration is stayed where the Act would otherwise permit it to go forward.”
(Volt, supra, 489 U.S. at p. 479, italics added.) Appellants argue that, in the
absence of the all-encompassing state choice-of-law provision in Volt, the Volt
court would have found that the FAA preempts section 1281.2(c). However, in
Volt, the high court, for purposes of argument, simply assumed that the procedural
rules of the FAA (9 U.S.C. §§ 3 and 4) applied in state courts. (Volt, supra, 489
U.S. at p. 477 [“we conclude that even if §§ 3 and 4 of the FAA are fully
applicable in state court proceedings, they do not prevent application of [Code
Civ. Proc.] § 1281.2(c) to stay arbitration where, as here, the parties have agreed
to arbitrate in accordance with California law”].)
Similarly,
in
Byrd and Moses H. Cone (federal diversity cases), the
procedural rules of the FAA clearly applied to those federal court proceedings.
Byrd required a federal district court to grant a party’s motion to compel
arbitration of the pendant state arbitrable claims, pursuant to sections 3 and 4 of
the FAA (9 U.S.C. §§ 3 and 4). (Byrd, supra, 470 U.S. at pp. 217-218, 223-224.)
Noting the legislative history of the FAA, the court commented that the act
“declares simply that such agreements for arbitration shall be enforced, and
provides a procedure in the Federal courts for their enforcement.’ H.R.Rep. No.
96, 68th Cong., 1st Sess., 1-2 (1924).” (Byrd, supra, 470 U.S. at p. 220, fn. 6.)
Also relying on the procedural rules of the FAA, Moses H. Cone held that the
federal district court erred in staying the federal court action seeking an order
17

compelling arbitration, pending resolution of a concurrent state court suit. (Moses
H. Cone, supra, 460 U.S. at pp. 21-26.) Thus, Byrd and Moses H. Cone do not
address the appropriate procedure in state courts.
We must still address appellants’ claim that section 1281.2(c) conflicts with
the spirit of the FAA because its application would undermine and frustrate 9
United States Code section 2’s policy of enforceability of arbitration agreements.
They argue that, under the rule of liberal construction set forth in Moses H. Cone,
due regard must be given to the federal policy favoring arbitration, and
ambiguities as to the scope of the arbitration clause should be resolved against the
application of the conflicting state rule. (Moses H. Cone, supra, 460 U.S. at pp.
24-25 [“The Arbitration Act establishes that, as a matter of federal law, any doubts
concerning the scope of arbitrable issues should be resolved in favor of arbitration,
whether the problem at hand is the construction of the contract language itself or
an allegation of waiver, delay, or a like defense to arbitrability.”].)
Volt answered a similar claim. There, the contractor argued that the
California Court of Appeal offended the Moses H. Cone principle by interpreting
the choice-of-law provision to mean that the parties intended the California rules
of arbitration, including the section 1281.2(c) stay provision, to apply to their
arbitration agreement. In rejecting that claim, the high court responded:
“Interpreting a choice-of-law clause to make applicable state rules governing the
conduct of arbitration—rules which are manifestly designed to encourage resort
to the arbitral process—simply does not offend the rule of liberal construction set
forth in Moses H. Cone, nor does it offend any other policy embodied in the
FAA.” (Volt, supra, 489 U.S. at p. 476, italics added.) The court further stated:
“[W]e think the California arbitration rules which the parties have incorporated
into their contract generally foster the federal policy favoring arbitration. As
indicated, the FAA itself contains no provision designed to deal with the special
18

practical problems that arise in multiparty contractual disputes when some or all of
the contracts at issue include agreements to arbitrate. California has taken the lead
in fashioning a legislative response to this problem, by giving courts authority to
consolidate or stay arbitration proceedings in these situations in order to minimize
the potential for contradictory judgments. See Calif. Civ. Proc. Code Ann. §
1281.2(c).” (Id. at p. 476, fn. 5.) Because “[t]here is no federal policy favoring
arbitration under a certain set of procedural rules” (id. at p. 476), the Court of
Appeal’s construction of the arguably ambiguous generic choice-of-law clause—
as incorporating both the state substantive law and state pro-arbitration rules
(rather than the FAA)—did not violate the Moses H. Cone principle. (Ibid.)
In contrast, the high court, in Mastrobuono v. Shearson Lehman Hutton,
Inc. (1995) 514 U.S. 52 (Mastrobuono), reached a result which, at first blush,
might appear to be inconsistent with Volt, but is not. Applying the Moses H. Cone
principle, it found that the generic choice-of-law clause in that case incorporated
the state substantive law, but not state arbitration rules. Mastrobuono involved the
interpretation of a standard form contract between a securities brokerage firm and
its customers, requiring arbitration. The choice-of-law provision provided that the
contract “ ‘shall be governed by the laws of the State of New York.’ ” (Id. at p.
53.) The arbitration provision contained no express reference to claims for
punitive damages. New York decisional law allowed courts, but not arbitrators, to
award punitive damages (the Garrity rule).7 A panel of arbitrators awarded
punitive damages, but a federal district court and federal Court of Appeal
disallowed the award. (Mastrobuono, supra, at pp. 54-55.)

7
Garrity v. Lyle Stuart, Inc. (1976) 40 N.Y.2d 354.
19



The petitioners argued that the FAA preempted the Garrity rule, while the
respondents relied on Volt, arguing that the choice-of-law provision incorporated
state arbitration rules, including the Garrity rule. The high court responded: “[a]t
most, the choice-of-law clause introduces an ambiguity into an arbitration
agreement that would otherwise allow punitive damage awards. As we pointed
out in Volt, when a court interprets such provisions in an agreement covered by the
FAA, ‘due regard must be given to the federal policy favoring arbitration, and
ambiguities as to the scope of the arbitration clause itself resolved in favor of
arbitration.’[Citations.]” (Mastrobuono, supra, 514 U.S at p. 62.) “We think the
best way to harmonize the choice-of-law provision with the arbitration provision is
to read ‘the laws of the State of New York’ to encompass substantive principles
that New York courts would apply, but not to include special rules limiting the
authority of arbitrators. Thus, the choice-of-law provision covers the rights and
duties of the parties, while the arbitration clause covers arbitration; neither
sentence intrudes upon the other.” (Id. at pp. 63-64, italics added.)
One commentator cogently explained the seemingly inconsistent results in
Volt and Mastrobuono: “In Volt, the state policy furthered the federal goal of
encouraging arbitration, and thus Moses H. Cone did not require construing
ambiguities toward applying the FAA. In Mastrobuono, however, the policy at
issue would have directly impeded the FAA’s goals, thus triggering the FAA
preemption. As a result, it should hardly be surprising that a choice-of-law clause,
in an agreement bound by the contract law and involving the arbitration rules of
one state, happened to produce a different result than did a choice-of-law clause in
an entirely different context.” (Note, An Unnecessary Choice of Law: Volt,
Mastrobuono, and Federal Arbitration Act Preemption (2002) 115 Harv. L. Rev.
2250, 2259-2260, fns. omitted.)
20

Unlike
the
Garrity rule addressed in Mastrobuono, section 1281.2(c) is not
a special rule limiting the authority of arbitrators. It is an evenhanded law that
allows the trial court to stay arbitration proceedings while the concurrent lawsuit
proceeds or stay the lawsuit while arbitration proceeds to avoid conflicting rulings
on common issues of fact and law amongst interrelated parties. Moreover,
“[s]ection 1281.2(c) is not a provision designed to limit the rights of parties who
choose to arbitrate or otherwise to discourage the use of arbitration. Rather, it is
part of California's statutory scheme designed to enforce the parties’ arbitration
agreements, as the FAA requires. Section 1281.2(c) addresses the peculiar
situation that arises when a controversy also affects claims by or against other
parties not bound by the arbitration agreement. The California provision giving
the court discretion not to enforce the arbitration agreement under such
circumstances—in order to avoid potential inconsistency in outcome as well as
duplication of effort—does not contravene the letter or the spirit of the FAA. That
was the explicit holding in Volt and nothing in Mastrobuono casts doubt on that
conclusion.” (Mount Diablo, supra, 101 Cal.App.4th at p. 726.) Thus, we need
not construe any ambiguities as to the scope of the arbitration provision against the
application of section 1281.2(c).8

8
We decline to follow Wolsey, Ltd. v. Foodmaker, Inc. (9th Cir. 1998) 144
F.3d 1205 in which the court relied on Mastrobuono and concluded that section
1281.2(c) governs the allocation of power between alternative tribunals and limits
the authority of arbitrators. Accordingly, it interpreted that the generic choice-of-
law provision did not incorporate section 1281.2(c) and precluded the federal
district court from applying the state rule. We also disapprove Warren-Guthrie v.
Health Net
(2000) 84 Cal.App.4th 804 and Energy Group, Inc. v. Liddington
(1987) 192 Cal.App.3d 1520 to the extent their holdings are predicated on the
conclusion that section 1281.2(c) limits the authority of arbitrators and conflicts
with the FAA.
21



Our opinion does not preclude parties to an arbitration agreement to
expressly designate that any arbitration proceeding should move forward under the
FAA’s procedural provisions rather than under state procedural law. We simply
hold that the language of the arbitration clause in this case, calling for the
application of the FAA “if it would be applicable,” should not be read to preclude
the application of 1281.2(c), because it does not conflict with the applicable
provisions of the FAA and does not undermine or frustrate the FAA’s substantive
policy favoring arbitration.
CONCLUSION
For the reasons stated above, we affirm the judgment of the Court of
Appeal.
CHIN, J.

WE CONCUR:

GEORGE, C.J.
KENNARD, J.
BAXTER, J.
WERDEGAR, J.
BROWN, J.
MORENO, J.

22



See next page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Cronus Investments v. Concierge Services
__________________________________________________________________________________

Unpublished Opinion


Original Appeal
Original Proceeding
Review Granted
XXX 107 Cal.App.4th 1308
Rehearing Granted

__________________________________________________________________________________

Opinion No.

S116288
Date Filed: March 10, 2005
__________________________________________________________________________________

Court:

Superior
County: Los Angeles
Judge: Richard B. Wolfe

__________________________________________________________________________________

Attorneys for Appellant:

William A. Soroky; Rehwald Rameson Lewis & Glasner, William Rehwald, Lawrence M. Glasner and
Daniel R. Chaleff for Plaintiff, Cross-defendant and Appellant and for Cross-defendant and Appellant.

Greines, Martin, Stein & Richland, Robert A. Olson and Cynthia E. Tobisman for Health Net of California
as Amicus Curiae on behalf of Plaintiff, Cross-defendant and Appellant and Cross-defendant and
Appellant.

__________________________________________________________________________________

Attorneys for Respondent:

Thomas J. Ready for Defendant, Cross-complainant and Respondent and for Defendants and Respondents.



Counsel who argued in Supreme Court (not intended for publication with opinion):

William A. Soroky
5855 Topanga Canyon Blvd., Suite 400
Woodland Hills, CA 91367
(818) 710-8498

Robert A. Olson
Greines, Martin, Stein & Richland
5700 Wilshire Boulevard, Suite 375
Los Angeles, CA 90036
(310) 859-7811

Thomas J. Ready
16633 Ventura Boulevard, Sixth Floor
Encino, CA 91436
(818) 907-0400


Opinion Information
Date:Docket Number:
Thu, 03/10/2005S116288

Parties
1Cronus Investments Inc. (Plaintiff, Cross-defendant and Appellant)
Represented by William Arthur Soroky
Attorney at Law
5855 Topanga Cyn Blvd #400
Woodland Hills, CA

2Colman, Howard Jon (Cross-defendant and Appellant)
Represented by William Rehwald
Rehwald Rameson & Lewis
5855 Topanga Cyn Blvd #400
Woodland Hills, CA

3Concierge Services (Defendant, Cross-complainant and Respondent)
4Westrec Marina Management (Defendant and Respondent)
5Health Net Of California (Amicus curiae)
Represented by Robert A. Olson
Greines Martin et al LLP
5700 Wilshire Blvd #375
Los Angeles, CA


Disposition
Mar 10 2005Opinion: Affirmed

Dockets
May 28 2003Petition for review filed
  apellants Cronus Investemnts, Inc., and Howard Jon Colman
May 30 2003Record requested
 
Jun 2 2003Received Court of Appeal record
  one doghouse.
Jun 17 2003Answer to petition for review filed
  respondent Concierge Services and respondents Westrec Marina Management, Inc., etal
Jun 23 2003Request for depublication (petition for review pending)
  by HealthNet of Calif. (non-party)
Jun 26 2003Reply to answer to petition filed
  appellants Cronus Investments, Inc. and Howard Jon Colman
Jul 16 2003Petition for Review Granted (civil case)
  Brown, J., was absent and did not participate. Votes: George, CJ., Baxter, Werdegar, Chin and Moreno, JJ.
Jul 17 2003Order filed
  In order to conform to the format prescribed by then Calif. Style Manual (Cal. Style Manual (4th ed. 2000) #6:6), the matter is retitled as follows: CRONUS INVESTMENTS, INC. ) Plaintiff, Cross-defendant and Appellant, ) v. ) S116288 CONCIERGE SERVICES, LLC, ) Ct. App. 2/4 B159591 Defendant, Cross-complainant and Respondent; ) WESTREC MARINA MANAGEMENT et al., ) Los Angeles County Superior Defendants and Respondents; ) Ct. No. LC060095 HOWARD JON COLMAN, ) Cross-defendant and Appellant. )
Jul 29 2003Certification of interested entities or persons filed
  appellants Cronus Investments, Inc. and Howard Jon Colman
Aug 1 2003Certification of interested entities or persons filed
  respondents Westrec Marina Management, Inc., et al
Aug 15 2003Opening brief on the merits filed
  apellants Cronus Investments, Inc and Howard Jon Colman
Sep 12 2003Answer brief on the merits filed
  respondent Westrec Marina Management.
Oct 2 2003Reply brief filed (case fully briefed)
  by counsel for appellants Cronus Investments, Inc. & Howard Jon Colman
Nov 4 2003Received application to file amicus curiae brief; with brief
  by Health Net of Calif. in support of aplt Cronus
Nov 10 2003Permission to file amicus curiae brief granted
  by Health Net of Calif. in support of pltf/aplt Cronus. Answers may be filed w/in 20 days.
Nov 10 2003Amicus curiae brief filed
  by Health Net of Calif in support of pltf/aplt
Dec 4 2003Response to amicus curiae brief filed
  counsel for resps' answer to a/c brief filed on behalf of Health Net Of California supporting appllnts'
Dec 8 2004Case ordered on calendar
  1/5/05 @9am - San Francisco
Dec 20 2004Filed:
  Request of appellant {Cronus Investments} to divide oral argument time.
Dec 30 2004Filed:
  The request of counsel for appellants to allow two counsel to argue on behalf of appellants at oral argument is hereby granted.
Dec 30 2004Filed:
  The request of appellants to allocate to amicus curiae Health Net of California 10 minutes of appellants 25-minute allotted time for oral argument is granted.
Jan 5 2005Cause argued and submitted
 
Mar 10 2005Opinion filed: Judgment affirmed in full
  Majority opinion by Chin, J. ------------------joined by George, C.J., Kennard, Baxter, Werdegar, Brown, Moreno, JJ.
Apr 12 2005Remittitur issued (civil case)
 

Briefs
Aug 15 2003Opening brief on the merits filed
 
Sep 12 2003Answer brief on the merits filed
 
Oct 2 2003Reply brief filed (case fully briefed)
 
Nov 10 2003Amicus curiae brief filed
 
Dec 4 2003Response to amicus curiae brief filed
 
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