Petition for Writ of Certiorari — SSW, Inc. v. Regents of the University of California

Supreme Court brief2005

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eve Court, U.S.

O tr

Q5-355SEP 15 2005 _

No. OFFICE OF THE CLBAK

IN THE

Supreme Court of the Gnited States

Petitioner,

Vv.

REGENTS OF THE UNIVERSITY OF CALIFORNIA,

Respondent.

On Petition For Writ Of Certiorari

To The Supreme Court of California

PETITION FOR WRIT OF CERTIORARI

KERRY L. KESTER MICHAEL E. LONDON

Counsel of Record MCINERNEY & DILLON, P.C.

JoEL D. HEUSINGER ONE KAISER PLAZA

KRISTA L. KESTER 18TH FLOOR

Woops & AITKEN,L.L.P. OAKLAND,CA 94612

SuITE 500 (510) 465-7100

301 SOUTH 13TH STREET

LINCOLN, NE 68508-2578

(402) 437-8500

QUESTION PRESENTED

I. To what extent does the FAA permit state courts to

displace federal arbitration law in order to avoid

enforcement of an arbitration arpreement?

A. Where parties to a contract involving interstate

commerce designate state law as the rule of decision

for some aspect of the contract, whether federal

arbitration policy and the Supremacy Clause are

offended by a judicial presumption that such

designation evidences the parties’ clear intent to

displace federal arbitration law with conflicting

state law.

. Whether state courts may utilize state law to stay

arbitration in favor of litigation where the

contracting parties have expressly agreed that

federal arbitration law would apply to the

enforcement of the arbitration agreement without

limitation by state law.

The following were parties to the proceeding in the

Supreme Court of California:

SSW, Inc. — Petitioner/Appellant below

Regents of the University of California —

Respondent/Appellee below

In addition, Tuthill, Inc. is a defendant in the

Superior Court case and participated as an appellant in the

appeal to the California Court of Appeal, but not in the

California Supreme Court. Fidelity & Deposit Company of

Maryland and Universal Underwriters Insurance Company

are defendants in the underlying Superior Court case, but did

not participate or enter an appearance in the proceedings

before the California Court of Appeal or the California

Supreme Court.

Petitioner, SSW, Inc., has no parent corporation and

no publicly held company owns ten percent or more of the

stock of SSW.

TABLE OF CONTENTS

QUESTION PRESENTED

LIST OF PARTIES AND AFFILIATES

TABLE OF CONTENTS

I REVIEW IS NECESSARY IN ORDER TO

CONSIDER WHETHER THE

SUPREMACY CLAUSE IS OFFENDED

BY A DE FACTO PRESUMPTION THAT

DISPLACES FEDERAL LAW IN FAVOR

OF CALIFORNIA LAW

A. The Supremacy Clause Voids Any State

Law, Whether Judicial Or Legislative In

Origin, That Burdens Federal Rights..........15

B. The Presumption Invoked By California

Courts Conflicts With And Displaces The

FAA’s Requirement That Arbitration

Agreements Be Enforced According To

Their Terms

1. The presumption operates where the

parties have selected California law

with respect to any aspect of their

contract, even if the arbitration

clause specifies a different body of

2. The California courts also have

employed the presumption that

California law applies, including

section 1281.2(c), when the parties

have contractually selected state law

other than California

C. The FAA Does Not Authorize The

Presumption That California Law

Displaces Federal Law In _ The

Enforcement Or Conduct Of An

Arbitration

1. This court properly may review the

California courts’ decisions, even if

they do implicate contract

interpretation, because the contract

affects important federal rights

2. Judicial review in this case is crucial

because the manner in which

California courts have enforced

contracts has the effect of nullifying

CONCLUSION

TABLE OF AUTHORITIES

Cases

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S.

BP Ce ieicvicninceninccennkapiindiciniententiisamdiniliaitievdunimsiitciiaiaid 4

Blankenship v. Parratt, 490 U.S. 1088 (1989) ............cc0000+ 8

Cronus Investment, Inc. v. Concierge Services,

aio ORR Y. yf > } .) ees passim

Davis v. Wechsler, 263 U.S. 22 (1923) .......cc00esee0 PEE Se 25

Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213

Discover Bank v. Superior Court of Los Angeles,

bey ae fs fe EMR Ree See ee 22

Doctor’s Associates, Inc. v. Casarotto, 517 U.S.

a SN RAR A SRC ST UR eR 10

Frankhouse v. Roth Capital Partners, LLC, No.

G033765, 2005 WL 1406004 (Cal. Ct. App. June

SG BI ectctinninntnceipaphcsasatinnissinianisansetnpenitiniats 16, 20, 21, 24

GMC v. Romein, 503 U.S. 181 (1992)..........-cccseserssseeereees 24

GMC v. Tracy, S19 U.S. Z7E (1997) ......ecccccsreeccsverovssesseses 25

Gilmer v. Interstate/Johnson Lane Corp., 500

CEs GaP CRUE ctenscleicsisatiesuesbaticavbtianiambcniistuvenssesicadaeaiseselid 4

Grace v. eBay, 101 P.3d 509 (Cal. 2004) .0........cccccseceenereeees 9

Grandholm v. Heald, __ U.S. __, 125 S. Ct.

1885 (2005)..

Indiana ex rei. .,..derson v. Brand, 303 U.S. 95

(1938)

James v. Kentucky, 406 U.S. 341 (1984)

Lockheed Martin Corp. v. S.C. (Adams), 96 P.3d

29 (Cal. 2004)

Mastrobuono v. Shearson Lehman Hutton, Inc.,

514 U.S. 52 (1995)

Memphis Gas Co. v. Beeler, 315 U.S. 649 (1942)

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985)

Mount Diablo Medical Center v. Health Net of

California, Inc., 124 Cal. Rptr. 2d 607 (Cal. Ct.

17, 18, 19, 20, 23

Moses H. Cone Memorial Hospital v. Mercury

Construction Corp., 460 U.S. 1 (1983)

Perry v. Thomas, 482 U.S. 483 (1987)

People v. Williams, 113 P.3d 532 (2005)

Rogers v. Alabama, 192 U.S. 226 (1904)

Southland Corp. v. Keating, 465 U.S. 1 (1984)

Volt Information Sciences, Inc. v. Board of

Trustees, 489 U.S. 468 (1989)

Walker v. City of Birmingham, 388 U.S. 307

Warren-Guthrie v. Health Net of California, Inc.,

101 Cal. Rptr. 2d 260 (2000)

Statutes and Rules

U.S. Const., art. VI, cl. 2

Federal Arbitration Act, 9 U.S.C. §§ 1-16

FE UA: cbnsddsnkaseumpeerinrecetiverinecinien reve dy 3, 4, 10, 21, 26

9 U.S.C. § 16(a)

28 U.S.C. § 1257(a)

Cal. Code Civ. Proc. § 1281.2(c)

i Be tn me RR Dy | Se eeee 7

Cal;Code Civ. Proc. § 1283

Cal. Code Civ. Proc. § 1283.05

Cal. Rules Court 29.3(b)

Cal. Rules Court 29.4(b)

Cal. Rules Court 976(c)

;

— ——

en, Sn I et cenleniieetieiecemiiaiiens 4

Construction Industry Rules of the American

Arbitration Association

Authorities

Wechsler, The Appellate Jurisdiction of the Supreme

Court: Reflections on the Law and the Logistics of

Direct Review, 34 Wash. & Lee L. Rev. 1043 (1977) 25

OPINIONS BELOW

All of the opinions below are unpublished opinions, and

can be found in the Appendix of this Petition (“App.”) as

follows:

California Supreme Court, dismissing review in light of

Cronus Investments, Inc. v. Concierge Services '

(May 18, 2005) — App. la

California Supreme Court, granting further review (Jan.

28, 2004) — App. 2a

California Court of Appeal, affirming Superior Court

(Oct. 24, 2003) — App. 4a

Superior Court for San Francisco County, California,

denying petition to compel arbitration (Oct. 15,

2001) — App. 25a

BASIS OF JURISDICTION

This Court has jurisdiction pursuant to 28 U.S.C. §

1257(a) and 9 U.S.C. § 16(a). First, this petition for a writ of

certiorari arises from the denial of SSW’s petition to compel

arbitration. Such a denial.is an appealable order pursuant to

9 U.S.C. § 16(a). Second, on May 18, 2005, pursuant to Cal.

Rules of Court 29.3(b), the Supreme Court of California

entered final judgment as to the petition to compel arbitration

by dismissing its prior order granting review of the court of

appeal decision. According to Cal. Rules of Court

29.4(b)(2)(B), a dismissal of review pursuant to Cal. Rules

' The decision in Cronus Investments, Inc. v. Concierge Swrvices is

published at 107 P.3d 217 (Cal. 2005), and appears for the Court's

convenience in the attached Appendix at App. 27a.

of Court 29.3(b) constitutes a final decision by the California

Supreme Court upon the filing of that dismissal.

RELEVANT STATUTORY PROVISIONS

The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16,

was intended to ensure that this nation’s courts enforce

arbitration agreements according to the intent of the parties.

More specifically, 9 U.S.C. § 2 provides that, in contracts

involving interstate commerce, agreements to settle

controversies through arbitration “shall be valid, irrevocable,

and enforceable, save upon grounds as exist at law or in

equity for the revocation of any contract.” Id.

Additionally, Cal. Civ. Proc. Code § 1281.2(c) permits

California courts to stay arbitration proceedings where “{a]

party to the arbitration agreemeni is also party to a pending

court action or special proceeding with a third party, arising

out of the same transaction or series of transactions and there

is a possibility of conflicting rulings on a common issue of

law or fact.” Jd.

STATEMENT OF THE CASE

This Petition does not contend that the decision in Volt

Information Sciences, Inc. v. Board of Trustees, 489 U.S.

468 (1989), was erroneous or that the FAA preempts section

1281.2(c) generally. In fact, the Petitioner accepts the

essential holding of Volt that, when chosen by the

contracting parties, section 1281.2(c) may be used to stay

arbitration in favor of litigation.

Rather, this Petition seeks iudicial review of the manner

in which arbitration rights are being burdened by the

California courts through the use of a de facto presumption

that the courts are not bound by parties’ selection of non-

California law in an arbitration clause, but instead may apply

section 1281.2(c) to stay arbitration without regard to and in

contravention of the parties’ express choice of law. Such a

presumption is completely at odds with this Court’s

determination in Vols that state law, rather than the FAA,

could be applied to arbitration agreements where the parties

have so agreed. The California presumption biatantly

disregards contractual choice-of-law clauses and, instead,

utilizes California's stay provision to frustrate and defez: the

parties’ stated intentions, in contravention of Voir, the FAA,

and the Supremacy Clause.

Thus, rather than challenge the merits of the decision in

Volt, the Petitioner here seeks to have Volt’s central holding

affirmed, clarified, and imposed upon the California courts

$0 as to require all courts to give effect to the paities” stated

intention to have the FAA (or some other law) govern their

arbitration agreement without limitation by California law.

Statutory Background

“The central purpose of the Federal Arbitration Act [is]

to ensure ‘that private agreements to arbitrate are enforced

according to their terms."” Mastrobuono v. Shearson

Lehman Hutton, Inc., 514 U.S. 52, 53-54 (1995). While

parties had been free to enter into agreements to arbitrate

disputes without the benefit of the FAA, its enactment was

deemed necessary by Congress to overcome “the judiciary's

longstanding refusal to enforce agreements to arbitrate.”

Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219-20

(1985); Volt, 489 U.S. at 478. To that end, § 2 of the FAA

provides that a written agreement to arbitrate in a contract

involving interstate commerce or a maritime transaction is

“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. Moreover, § 2 applies both in state

and federal courts. Allied-Bruce Terminix Cos. v. Dobson,

513 U.S. 265, 272 (1995) (reaffirming the application of § 2

to state courts as announced in Southland Corp. v. Keating,

465 U.S. 1, 12-15 (1984)).

As this Court has explained, the FAA permits and

empowers contracting parties tc “trade” the usual rules and

procedures attendant to courtroom litigation for the relative

“simplicity, informality, and expedition of arbitration.”

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 31

(1991) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614, 628 (1985)).

Accordingly, all courts are required to “enforce privately

negotiated agreements to arbitrate, like other contracts, in

accordance with their terms.” Volt, 489 U.S. at 479. In fact,

such enforcement is to be “rigorous” in order to give effect

to the contractual agreement. /d. at 221 (quoting Dean

Witter, 470 U.S. at 221). This is so “notwithstanding the

presence of other persons who are parties to the underlying

dispute but not to the arbitration agreement.” Moses H.

Cone Mem’! Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 20

(1983). Thus, the FAA does not retreat where “piecemeal”

resolution of disputes might result from the enforcement of

an agreement to arbitrate. Quite to the contrary, the FAA

“requires piecemeal resolution when necessary to give effect

to an arbitration agreement.” /d. (emphasis in original).

The Supreme Court Decision in Volt

In a series of cases during the 1980s, the Court

emphasized the FAA’s unyielding requirement that

arbitration agreements be enforced according to their terms.

See Moses H. Cone, 460 U.S. 1; Southland v. Keating, 465

U.S. 1; Perry v. Thomas, 482 U.S. 483 (1987). In each of

those cases, the Supreme Court reversed lower court

decisions, requiring that the FAA be given effect and that the

arbitration agreements at issue be enforced to the exclusion

of any conflicting provisions of state law. Moses H. Cone,

460 U.S. at 24; Southland v. Keating, 465 U.S. at 12; Perry

v. Thomas, 482 U.S. at 491.

Those cases precipitated an argument that parties could

not agree to have their arbitration bound by any rules or law

other than the FAA. The issues presented in Volt squarely

framed the misapprehension of the earlier cases and the

Court took occasion to clarify the interaction between state

law and the FAA. 489 U.S. 468. Volt presented the first

“reported dispute over the use of a choice-of-law provision to

stay arbitration under section 1281.2(c) on the ground that

the existence of both arbitrable and nonarbitrable claims

created an impermissible risk of inconsistent results if the

arbitration was permitted to proceed. The contract in Volt

contained a general choice-of-law provision calling for

California law to govern the contract. The arbitration clause

did not otherwise limit the application of California law or

specify any other law to govern the arbitration agreement.

The trial court concluded that the contract revealed the

parties’ intention to use California law in all respects,

including the stay provision of section 1281.2(c).

This Court reiterated that, in applying general state-law

principles of contract construction to an arbitration

agreement within the scope of the Act, “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.” Volt, 489 U.S. at 475-76.

However, within that framework, the parties to a contract are

quite capable of choosing procedures other than those of the

FAA to govern the arbitrability of their claims. Jd. at 476-

77. In so holding, the Supreme Court declined to consider

whether, in fact, the parties had so agreed; rather, the Court

assumed that the state court's interpretation of the arbitration

agreement was correct and that the parties had “agreed to

abide by state rules of arbitration.” /d. at 479; see also id. at

477 (noting that the parties had “agreed to arbitrate in

accordance with California law”).

Justice Brennan’s concerns, expressed throughout his

dissent in Volt, portrayed clearly the method by which state

courts might eviscerate the rights thought to be guaranteed

by the FAA. Justice Brennan warned that through the facade

of contract interpretation state courts would be given license

to refuse enforcement of arbitration agreements. Justice

Brennan was concerned that contract construction would be

used wrongly to attribute to parties intentions clearly at odds

with their arbitration agreement and their stated intentions to

resolve all of their disputes without resort to litigation. That

is precisely the result of the line of California appellate cases

decided since Volt.

Nevertheless, in the absence of evidence that the

California courts were acting other than in deference and

respect to the FAA, the majority did not find Justice

Brennan's warnings to be compelling. However, the judicial

restraint observed by the majority in Volt does not, and

should not foreclose a critical analysis of the liberties that

have been taken recently by the California courts to stay

arbitration using California law notwithstanding parties’

stated intent to the contrary.

Factual Background in the Instant Case

In 1994, SSW entered into a subcontract with Walsh

Construction Co. (“Walsh”) with respect to a construction

project for the University of California. The subcontract

included an arbitration agreement that specified arbitration as

the sole mechanism for the resolution of disputes arising

from the subcontract.? The prime contract between Walsh

and the University did not contain an arbitration agreement.

Problems arose on the Project and, in 1999, the Board of

Regents (“Regents”) brought suit against Walsh in the

California Superior Court for, among other things, breach of

contract. Two years later, the Regents, acting as a purported

third-party beneficiary, amended its complaint to include

claims against SSW for alleged breaches of contract and

warranty.

? The SSW subcontract arbitration agreement provides, in pertinent part:

If the foregoing procedures do not resolve the dispute, the

dispute shall be decided by arbitration in accordance with the

Construction Industry Arbitration Rules of the American

Arbitration Association then prevailing as supplemented by

Section 1282.6, 1283, and 1283.05 of the California Code of

Civil Procedure. Selection of arbitrators shall be in

accordance with rules of the American Arbitration

Association. The Arbitrators shall be bound by, and apply

California law. . . . The foregoing agreement to arbitrate and

any other agreement to arbitrate with an additional person or

persons duly consented to by the parties hereto shall be

specifically enforceable under the prevailing Arbitration Law.

App. 6a.

SSW promptly filed a petition to compel arbitration.’

The superior court denied the petition on the ground that the

subcontract’s general choice-of-law clause rendered the FAA

inapplicable and permitted a stay of the arbitration pursuant

to Cal. Civ. Proc. Code § 1281.2(c). App. 2Sa-26a. The

California Court of Appeal affirmed the decision staying

arbitration, thereby refusing to enforce the arbitration

agreement as would be required by the FAA. App. 23a.

Following the court of appeal’s decision, the California

Supreme Court granted SSW’s request for further review and

sinwultaneously deferred further action on the case pending

disposition in Cronus Investment, Inc. v. Concierge Services,

LLC., another case involving application of section 1281.2(c)

to a contract in which the parties’ arbitration agreement

specified that it would be governed by the FAA. App. 2a.

Arguments were heard in Cronus in January 2005 and a

decision was rendered in March 2005. Two months later, the

California Supreme Court dismissed review of SSW’s appeal

“{ijn light of the decision in Cronus Investments, Inc. v.

Concierge Services (2005) 35 Cal. 4th 376.” App. la. No

other rationale was given for the adjudication in SSW. Thus,

the court’s adjudication of SSW can only be understood

through the ultimate holding in Cronus.‘

> SSW also demurred on the ground that the subcontract specifically

foreclosed the creation of any third-party beneficiary relationship, such

as the one upon which the Regents based their suit against SSW. The

Superior Court's denial of the demurrer was not immediately appealable

and is not at issue in this case.

* The courts routinely establish the principles and analysis relevant to a

particular case by summarily disposing of the matter “in light of” another

decision or legislative action. See, ¢.g., Blankenship v. Parratt, 490 U.S.

1088 (1989) (granting certiorari and remanding to court of appeals for

For the avoidance of doubt, SSW’s petition for a writ of

certiorari does nor revolve around the superior court’s

construction of the contract and the arbitration provision

therein ~ as erroneous as SSW believes that construction to

be. Rather, SSW’s petition for a writ of certiorari springs

from the California Supreme Court’s subsequent application

of a de facto presumption that California procedural law will

supplant the FAA irrespective of the particular law chosen

by the parties in the arbitration agreement. The presumption

is invoked even where the parties’ contract indicates that the

FAA, rather than California law, is selected to govern the

arbitration agreement.

The Decision in Cronus v. Concierge Services

The court in Cronus confirmed that the contract’s

general choice-of-law provision (selecting California law)

further consideration “in light of” decision in a case raising the same

issues).

The California Supreme Court, pursuant to Cal. Rules of Court

29.3(b), could have ordered the publication of the court of appeal

decision if the opinion below was intended to be the law of the State. See

also Cal. Rules of Court 976(c) and 976.1 (outlining purposes for which

court of appeal decisions may be published).

However, in this instance, the California Supreme Court, by

specifically referencing its decision in Cronus instead of deferring to the

opinion of the Court of Appeal in SSW and requesting publication of that

decision, indicated that its decision in Cronus, not the Court of Appeal

opinion in SSW, is the law of the State of California. Compare Grace v.

eBay, 101 P.3d 509 (Cal. 2004) (dismissing review and remanding to

court of appeal without further reference to any legal authority or

decision) with People v. Williams, 113 P.3d 532 (2005) (vacating Court

of Appeal decision “in light of” another California Supreme Court

decision) and Lockheed Martin Corp. v. S.C. (Adams), 96 P.3d 29 (Cal.

2004). Therefore, we must look to the decision in Cronus, as well as the

decision in the Court of appeal to truly understand the full legal

ramifications of the dismissal of review in the underlying case.

was superseded by the more specific language of the

arbitration agreement, and that the parties had intended for

the FAA to apply to the “fullest extent” and “without

limitation” to the arbitration agreernents, notwithstanding the

contract’s general choice-of-law provision. App. 3la. In

fact, the court noted that the parties “agreed” that the FAA

limited the applicability of California law otherwise called

for in the general choice-of-law clause. App. 39a.

However, in spite of the parties express agreement that

the FAA was intended to govern, the California Supreme

Court refused to give effect to § 2 of the FAA and, instead,

applied section 1281.2(c) to stay the arbitretion while forcing

the parties to resolve their disputes in litigation rather than

arbitration — a result absolutely repugnant to the FAA.

In addition, the court embraced the opportunity to upend

Voit's long-standing rule by holding that state arbitration

provisions (rather than the FAA) would apply by default to

the procedural aspects of the arbitration unless the parties

“expressly” designated that the FAA was to apply. App.

50a. That ruling is diametrically opposed to this Court’s

holding that requires application of the FAA unless the

parties clearly express an intention to have state law supplant

the rights afforded by the FAA. Volt, 489 U.S. at 475-478;

Perry v. Thomas, 482 U.S. at 491; Doctor's Assocs., Inc. v.

Casarotto, 517 U.S. 681, 688 (1996); Mastrobuono, 514

U.S. at 56-58.

California Supreme Court Decision in SSW

In light of the rules articulated in Cronus, the California

Supreme Court's decision in SSW did not require any further

analysis of the issues on review because state law, including

section 1281.2(c), would apply to the arbitration as a result

of the general choice-of-law clause irrespective of whether

the parties intended that federal law, rather than state law,

govern the enforcement of their arbitration agreement.

The facts in SSW parallel those in Cronus. Here, the

contract contains a general choice-of-law provision selecting

California law. In addition, the arbitration agreement refers

to California law in two specific manners, neither of which

related to the enforcement of the agreement to arbitrate.

First, three specific sections of the California Civil Code of

Procedure relating to subpoenas were invoked to supplement

the Construction Industry Rules of the American Arbitration

Association. Second, the arbitrators were to be “bound by

and apply” California law. On the other hand, enforcement

of the arbitration agreement was to be governed, not by

California law, but by “Arbitration Law.” App. 7a. The

lower courts construed the parties’ intentions to be that ail

California law applied by virtue of the general choice-of-law

provision. App. 20a-23a, 25a-26a.

However, the California Supreme Court did not examine

or opine on the lower courts’ conclusions, which turned upon

the interpretation of the arbitration agreement. Instead, the

court relied solely upon its decision in C” ws to reject

SSW’s petition to compel arbitration.

The Cronus decision had openly rejected the parties’

contractual agreement as to the law that would govern the

arbitration agreement and, instead, presumptively applied

California law as a default.

According to Cronus, California procedural law would

be invoked to stay the arbitration irrespective of the law

selected by the parties to govern the enforcement of the

arbitration agreement. See App. 39a-50a. Notwithstanding

the parties’ expression of which rule or law to apply to

specific aspects of the arbitration, those designations

apparently were not sufficiently express to be an “express

designation” cf the procedural law to be applied. Thus, the

California court defaulted to the California provisions,

including section 1281.2(c), which effectively negates

SSW’s right to arbitrate without ever determining whether

the parties intended for state or federal law to apply.

The California Supreme Court found no need to

determine whether SSW and Walsh inte: »:'ed their arbitration

agreement to be governed by state or federal arbitration law

because, as Cronus established, section 1281.2(c) should be

applied regardless of the terms of the parties’ contract. That

is, the court presumed the parties intended such a result from

the existence of the general choice of law clause.

The California Supreme Court's decision in SSW, as it

springs from Cronus, evinces a conclusion even more

disruptive to the intent of the contracting parties than was the

California court of appeal’s decision in SSW. While the

court of appeal at least hinged its decision on the particular

wording of the arbitration agreement, and in SSW’s opinion

incorrectly determined the intent of the parties, the California

Supreme Court concluded that section 1281.2(c) should

apply irrespective of the intent of the parties.

Together with the decision in Cronus, the underlying

decision in SSW acts to further widen the gulf between

California state courts and nearly every other jurisdiction, as

it relates to enforcement of arbitration agreements,

application of federal law in state forums, and interpretation

of arbitration agreements which involve interstate commerce.

REASONS FOR GRANTING THE PETITION

Review is warranted in this case to curb the recent

practice in the California courts of discriminating against

federal arbitration rights and grossly distorting the rule

articulated in Volt. Apparently believing that Vols authorized

unlimited license to apply state law to arbitration

agreements, California courts routinely impose on parties a

presumption that California arbitration law is preferred over

Federal law. That presumption also makes applicable

California state law rules of procedure and permits the courts

to stay arbitration pursuant to those rules irrespective of the

parties’ express agreement that the FAA is to apply without

limitation by state law. Such discriminatory construction of

arbitration agreements is prohibited by the FAA, where the

FAA is not displaced by the parties themselves.

To be sure, the California courts continue to give lip-

service to the premise that arbitration agreements be

construed with “due regard” to the federal policy favoring

arbitration and that federal law requires that “any doubts

concerning the scope of arbitrable issues should be resolved

in favor of arbitration.” Cronus, App. 34a-37a. However, in

actuality, the California courts require that the parties clearly

express their adoption of federal law rather than California

law, even though this Court consistently has required

precisely the opposite. Volt, 489 U.S. at 478-479

(establishing that, to displace the FAA, parties must clearly

express their intent to reject the FAA and adopt state law).

Moreover, a survey of cases decided by the California

courts since Volt reveals that the California courts

consistently and virtually without exception have refused to

find contract language sufficient to express the requisite

“clear adoption” of federal law. The presumption that

California arbitration law is to be preferred tums the

Supremacy Clause on its head, defaulting to California

arbitration law in circumstances of ambiguity and even

where there is a clear indication that the parties intended

federal law to apply.

Additionally, the Court should review the underlying

decisions because the principles of contract construction

employed by the California courts in such instances

effectively nullify federal arbitration rights. This Court is

not powerless to scrutinize and annul state court actions that

displace federal rights.

i. REVIEW IS NECESSARY IN ORDER TO

CONSIDER WHETHER THE SUPREMACY

CLAUSE IS OFFENDED BY A DE FACTO

PRESUMPTION THAT DISPLACES FEDERAL

LAW IN FAVOR OF CALIFORNIA LAW.

In a series of recent decisions, culminating in the recent

decision in SSW, the California courts have enforced an

arbitrary presumption that renders enforcement of an

arbitration agreement virtually impossible if the contracting

party is susceptible to suit in California — particularly if the

contract includes any type of choice-of-law clause indicating

the selection of California law for any purpose, whether

narrowly or broadly drafted. The application of Volt by

California courts has evolved to the point that practitioners

can routinely join in litigation parties with whom they have

arbitration agreements with non-arbitrating third parties in

order to defeat pending arbitration demands.

California courts have taken this tact even where the law

of a different jurisdiction is chosen by the parties and when

such other jurisdictions would enforce arbitration and stay

the licigation as a matter of law. That is, California courts

preclude arbitration under the FAA based on the fiction that

the parties whose contracts contain choice-of-law clauses

choosing even non-California state law must, therefore,

intend not to arbitrate in accordance with the FAA.

The presumption of intent to displace federal law

offends and violates the Supremacy Clause because the

presumption effectively preempts federal law in favor of

inconsistent and conflicting state law principles.

A. The Supremacy Clause Voids Any State Law,

Whether Judicial Or Legislative In Origin, That

Burdens Federal Rights.

Although the United States is a republic holding fast to

the rights of the various states, federal law — duly enacted in

accordance with the United States Constitution -

unquestionably enjoys through the Supremacy Clause a

position of authority superior to that of state law. U.S.

Const, art. VI,cl.2. More particularly, the Supremacy

Clause prohibits application of state rules that conflict with

or displace otherwise applicable federal rights or law. Such

provisions “must give way” to federal rights. Perry v.

Thomas, 482 U.S. at 490. Were the rule anything else, the

Supremacy Clause would be emptied of its primacy by

permitting state judicial or legislative pronouncements to

invalidate and deny rights created by federal law. See

Walker v. City of Birmingham, 388 U.S. 307, 338 (1967)

(Brennan, J. dissenting).

This Court has confirmed repeatedly that the right to

enforce a contractual arbitration agreement by its terms is

protected by federal law through the enactment of the FAA.

As noted in Perry v. Thomas, the FAA “embodies Congress’

intent to provide for the enforcement of arbitration

agreements within the full reach of the Commerce Clause.”

482 U.S. at 490. In fact, “the preeminent concern” of

Congress in passing the FAA was to enforce “rigorously”

such private agreements. Jd. (declaring California law that

required judicial forum for resolution of wage disputes in the

face of an arbitration agreement to be preempted by the

FAA).

Where state rules conflict with federal law, the

Supremacy Clause voids the substantive rule that would have

the effect of displacing federal rights. Quite simply, federal

law will not be rendered impotent by state law. Rather, it is

the competing state law principle — whether it be of judicial

or legislative creation — that must yield so as to permit full

enjoyment of those sights (and obligations) created by

The California state courts have created and enforced a

de facto presumption that applies California state law to

frustrate a party’s right to enforce an arbitration agreement

under the FAA, irrespective of the particular law chosen by

the agreement of the parties. See Cronus, App. 27a;

Frankhouse v. Roth Capital Partners, LLC, No. GO33765,

2005 WL 1406004 (Cal. Ct. App. June 16, 2005). In its

barest terms, the judicially created presumption provides

that, so long as an action is pending in the California state

courts:

Enforcement of a contractual agreement to arbitrate

will be determined by application of California

procedural law without regard to other provisions of

the arbitration agreement that invoke federal law or

some other state law to govern the agreement.

To be sure, the courts have not labeled the presumption as

such. Yet operation of the presumption is instantly

recognizable from recent California court decisions.

1. The presumption operates where the parties

have selected California law with respect to

any aspect of their contract, even if the

arbitration clause specifies a different body

of law.

The presumption is most frequently invoked (although

as explained below, not exclusively invoked) where the

parties have included within the contract a general choice-of-

law provision selecting California law to govern the contract.

See, e.g., Cronus, App. 27a; Mount Diablo Med. Ctr. v.

Health Net of Cal., Inc., 124 Cal. Rptr. 2d 607 (Cal. Ct. App.

2002). The courts have asserted that those cases logically

flow from the holding in Volt. However, that rationale rings

hollow. Quite apart from the Court’s teaching in Volt that

requires the court to give effect to the parties’ agreement, the

California courts have simply given effect to California

procedural law, whether or not the parties selected it to

govern the arbitration agreement.

As discussed above, the recent decision in Cronus

illustrates that, so long as the parties to an arbitration

agreement are amenable to suit in California, those parties

are presumed by the courts to have intended for California

law to apply and for the courts to have discretion to stay

arbitration. See supra at 27a. This presumption was utilized

in Cronus to defeat federal rights granted by the FAA despite

the court’s recognition that the parties had agreed that

California law was not to apply to the arbitration agreement.

The court further noted in Cronus that California usurped

federal law in that instance because federal law (the law

chosen by the parties) was inconsistent with California law.

App. 27a.

The origins of the presumption can be seen in the court

of appeal’s.decision in Mount Diablo, 124 Cal. Rptr. 2d at

607. An earlier California court of appeal decision had

correctly recognized Volt as having application only where

the parties had clearly expressed in the contract their

intention to be governed by California procedural rules

relating to arbitration. See Warren-Guthrie v. Health Net of

Cal., Inc., 101 Cal. Rptr. 2d 260 (2000). In resolving a

motion to compel arbitration, the court in Warren-Guthrie

declined to apply section 1281.2(c) because the arbitration

provision contained express language that California

arbitration law was applicable only with respect to the

manner in which the arbitration was to be “conducted,” as

distinguished from agreeing that California arbitration law

was to apply for all purposes. /d. at 268-69.”

However, that decision was rejected three years later by

a different panel of judges in Mount Diablo, 124 Cal. Rptr.

2d at 615.° In contrast to the measured decision in Warren-

* The arbitration provision stated: “Al! Arbitration shall be conducted

in accordance with the California Code of Civil Procedure, commencing

with Section 1280." Warren-Guthrie, 101 Cal. Rptr. 2d at 268.

* The decision in Mount Diablo was authored by Judge Pollak, who also

had ruled upon SSW's petition to compel arbitration in 2001 prior to his

appointment to the court of appeal.

Guthrie, the court in Mount Diablo determined that a general

choice-of-law clause that called for California law to govern

the “enforcement” of the contract constituted an expression

of intent for California arbitration law to also govern the

enforceability of the arbitration agreement.’ Jd. at 615.

Accordingly, the petition to compel arbitration in that case

was denied.

What is most interesting is that the foundation for the

decision in Mount Diablo was the fact that the choice-of-law

provision referenced “enforcement” of the contract in

general, although there was no specific reference to

enforcement of the arbitration agreement. The court

determined that a designation of law for purposes of the

enforcement of the contract was sufficient to also evidence

intent to have that law apply to the enforcement of the

arbitration agreement, in the absence of any other

designation of law.

However, that rationale was abandoned by the

California courts when the same issues later arose in Cronus

and SSW. In those cases, the arbitration provisions

themselves designated the body of law to govern the

enforcement of the arbitration agreement. In fact, in Cronus,

the arbitration agreement stated that federal law was not to

be limitec by the designation of state law for any purpose.

Cronus, App. 31a. Under the reasoning of Mount Diablo,

the law designated for enforcement of the arbitration

agreement would have been given effect without question in

Cronus and SSW.

’ The choice of law provision in Mount Diablo was separate from the

arbitration agreement and stated only that that “validity, construction,

interpretation and enforcement of this Agreement shall be governed by

the laws of the State of California.” Mount Diablo, 124 Cal. Rptr. 2d at

609.

But the reasoning of Mount Diablo was not followed.

Instead, the court used Cronus to articulate the presumption

that permits courts to displace the FAA with state law, and

then applied that presumption in SSW.

2. The California courts also have employed

the presumption that California law applies,

including section 1281.2(c), when the parties

have contractually selected state law other

than California.

The California court of appeal recently established the

irrebuttable nature of the presumption in Frankhouse, 2005

WL 1406004, where the court used section 1281.2(c) to stay

arbitration even though the only choice-of-law provision in

the contract selected another state’s law to govern the

contract.

Frankhouse presented a situation where both arbitrable

and non-arbitrable claims were pending against the

defendants and, hence, the prospect that the claims could not

be resolved in a single forum. Jd. at *3-5. The contract

selected New York law to govern the contract, and did not

mention in any manner California law. /d. at *5. Nor was

there apparently a forum selection clause that required the

dispute to be heard in California. /d.

Notwithstanding its conclusions that the arbitration

clause was contained in a contract involving interstate

commerce and was thus subject to the FAA, and that New

York law was selected by the parties, the court applied

California |aw over either New York or federal law, and

stayed the arbitration pursuant to section 1281.2(c). Jd at

*5-6.

Without question, the court in Frankhouse strained to

reach its result. First, the courts in essence presumed that

California law should apply to the arbitration agreement in

spite of the parties’ selection of New York law to govemn

their contract and the absence of any mention of California

law in the contract.

Second, the court justified its application of California

state law (even though the parties had wholly excluded

California law from their agreement) on the premise that Volt

allowed the parties to agree to apply state law over the FAA.

Id. at *6. Yet, the parties in Frankhouse had expressly

chosen New York law, not California law.

To the extent that the court in Frankhouse might not

have known New York law, the resolution was easily found

in this Court’s recognition that § 2 of the FAA is a

declaration of the “liberal federal policy favoring arbitration

agreements” and that ambiguities or uncertainties with

respect to arbitrability must be resolved with a healthy

respect for arbitration under the FAA. Moses H. Cone, 460

U.S. at 24. However, rather than default to the FAA, the

court in Frankhouse applied California law despite the

parties’ selection of New York law.

Thus, notwithstanding the supreme court’s assurance

that parties can contract out of section 1281.2(c)’s

application by expressly designating the application of state

law other than California, see Cronus, App. 50a, it is

abundantly clear that any such attempt to contractually

specify application of the FAA will be rebuffed and rejected

by the California courts. The “assurance” is, undoubtedly,

illusory.

More recently, this presumption also has been applied to

discriminate against federal arbitration rights in general, not

just those involving multi-party litigation that would invoke

the stay provisions of section 1281.2(c). See, e.g., Discover

Bank v. Super. Ct., 113 P.3d 1100 (Cal. 2005) (disregarding

contractual selection of Delaware law with respect to

enforceability of class action waiver in order to invite

conflict of law analysis).

w la ed

Enforcement nduct

Arbitration.

The presumption that has been developed and employed

by the California courts is in direct conflict with the FAA

and with this Court’s decisional law. The Supremacy Clause

pointedly invalidates state law that conflicts with federal law

or burdens rights afforded by federal law. The presumption

employed by the California courts runs afoul of the FAA and

the Supremacy Clause because it imposes precisely that

burden upon federal arbitration rights.

The myth that 1281.2(c) merely alters the timing of

arbitration, without affecting the contracting party’s ability

to resolve an arbitrable dispute through that forum, is

specious. Without question, the California courts have and

continue to use section 1281.2(c) to require that arbitration

sit on the sideline while litigation goes forward in order to

“prevent inconsistent results.” However, that rationale

illustrates that the very issues being litigated are those that

were intended by the parties to be arbitrated. Moreover, the

preclusive effect of litigation is such that the arbitrator will

have nothing to do but enter findings based upon the

litigation without permitting the parties to resolve the

arbitrable issues in the forum that was contractually agreed.

See Mount. Diablo, 124 Cal. Rptr. 2d at 618 (recognizing

that, having been brought within the court’s jurisdiction

despite its arbitration agreement, the party will be “bound by

the outcome and undoubtedly will find it in its best interest

to defend the litigation”).

As noted at the outset of this petition, the critical issue

here is not the application of contract construction principles

by the California courts. Rather, the issue is the manner in

which the California courts have nullified the federal

arbitration rights by applying section 1281.2(c) despite

having determined that the contracting parties did not choose

California law to govern their arbitration agreement.

This case presents an appropriate vehicle for further

refinement of the majority’s opinion in Volt that contracting

parties can provide for the application of law other than the

FAA. The majority decision in Volt neither precludes nor

resolves the issues presented by this case. First, Volt is a

picture of judicial restraint. The Court appropriately limited

its holding to the facts and the issues raised by the parties.

The challenge in Volt was directed to the validity of section

1281.2(c), vis-a-vis the FAA. The Court rejected the notion

that Moses H. Cone stood for the principle that federal law

required arbitrations to be fully governed by federal law, and

held that section 1281.2(c) was not ~seempted by the FAA to

the extent that the parties had agreed to the application of

that state law provision to their contract and arbitration

agreement.

Without this Court’s review and refinement, parties who

find themselves before California courts will continue to

have virtually no ability to enforce an arbitration provision,

even if they have specifically contracted to have the FAA

rather than state law, govern their arbitration agreement.

Although the surrounding circumstances may not have

warranted such scrutiny in 1989, see Volt, 489 U.S. at 476,

481, the California cases decided during the past five years

give ample basis for such consideration. See, e.g., Cronus,

App. 27a; SSW, App. 4a; Frankhouse, 2005 WL 1406004;

Mount Diablo, 124 Cal. Rptr. 2d 607.

1. This court properly may _revie

California courts’ decisions, even if they do

implicate contract interpretation, because

the contract affects important federal rights.

Even to the extent that certiorari in this case requires

review of contract interpretation by state courts, the general

deference paid by this Court to state court decisions on

contract interpretation is not unlimited. This Court can and

should examine the manner in which state courts are

construing contracts in order to guard against the arbitrary

denial of federal rights.

Generally, the Supreme Court affords “respectful

consideration and great weight to the views of the States’

highest court” as to the formation and construction of

contracts under state law. GMC v. Romein, 503 U.S. 181,

187 (1992). However, the Supreme Court is “ultimately

bound to decide for [itself] whether a contract was made.”

Id. (quoting with approval Indiana ex rel. Anderson v.

Brand, 303 U.S. 95, 100 (1938)).

In the samme way, even though meaning and cffect of a

contract are questions generally settled by state courts, that

rule does not apply universally. Rather, the Supreme Court,

“in the performance of its duty to safeguard an asserted

constitutional right, may inquire whether the decision of the

state question rests upon a fair or substantial basis.”

Memphis Gas Co. v. Beeler, 315 U.S. 649, 654 (1942).

“(T)he exercise of jurisdiction by this Court to protect

constitutional rights cannot be declined when it is plain that

the fair result of a decision is to deny the rights. It is well

known that this Court will decide for itself whether a

contract was made as well as whether the obligation of the

contract has been impaired.” Rogers v. Alabama, 192 U.S.

226 (1904). See also James v. Ky., 466 U.S. 341, 349 (1984)

(quoting with approval Davis v. Wechsler, 263 U.S. 22, 24

(1923) (Holmes, J.) (“The assertion of federal rights, when

plainly and reasonably made, is not to be defeated under the

name of local practice.”).

Consequently, the Supreme Court is not obligated to

accept the edict of a state court when federal rights are

burdened thereby.

The Court’s jurisdiction and obligation are not altered in

this case by the mere fact that the federal right at issue is

statutory rather than constitutional. Where “the existence or

application of a federal right turns on a logically antecedent

finding on a matter of state law, it is essential to the Court’s

performance of its function that it exercise an ancillary

jurisdiction to consider the state question. Federal rights

could otherwise be nullified by the manipulation of state

law.” Wechsler, The Appellate Jurisdiction of the Supreme

Court: Reflections on the Law and the Logistics of Direct

Review, 34 Wash. & Lee L. Rev. 1043, 1052 (1977).

The Commerce Clause aims to preserve a national

market for competition undisturbed by preferential

advantages” created by state law, GMC v. Tracy, 519 U.S.

278, 299 (1997), and was designed to avoid altering the

terms upon which business interests must compete based

upon the particular state in which the business was

conducted. Accord Grandholm v. Heald, __ U.S. ___, 125

S. Ct. 1885 (2005). Thus, states are not permitted, through

application of local law, to discriminate against the right to

enforce a contractual arbitration agreement that was created

by § 2 of the FAA.

The burden being imposed upon federal arbitration

rights by the California courts has been exhaustively

discussed above. Most importantly for this discussion, that

burden is based upon oblique references to the majority’s

decision in Volt and is being imposed in the name of

“contract interpretation.” Notably, the burdens exposed by

the decisions in SSW and Cronus are the very same burdens

about which Justice Brennan voiced concern in his

dissenting opinion in Volt. And, while the majority did not

find those concerns compelling under the facts in Volt, the

record of judicial action now before the Court provides

evidence that Justice Brennan’s fears have, in fact, become

reality. This case provides the appropriate vehicle to resolve

the manner in which contracting parties must express their

intention to have federal arbitration law govern their

agreement, whether enforcement of that agreement is sought

in California or any other jurisdiction.

In fact, Justice Brennan was nothing short of clairvoyant

when he asserted that judicial review of the state court's

contract interpretation was equally appropriate with respect

to arbitration matters as in matters involving impairment of

constitutional rights. See Volt, 489 U.S. at 482-84 (Brennan,

J., dissenting). As he cautioned in 1989, “the right of the

instant parties to have their arbitration agreement enforced

pursuant to the FAA could readily be circumvented by a

state-court construction of their contract as having intended

to exclude the applicability of federal law.” Volt, 489 U.S. at

484. Moreover, Justice Brennan cautioned that, if

unchecked, the use of unprincipled contract interpretation

could essentially strip the FAA of any application in the

hands of state courts:

Were every state court to construe such clauses as an

expression of the parties’ intent to exclude the

application of federal law, as has the California Court of

Appeal in this case, the result would be to render the

Federal Arbitration Act a virtual nullity as to ) poeeeay

existing contracts.

Id. at 491.

The hostile climate toward arbitration agreements that

parties now find in the California courts implicates precisely

the concerns voiced by Justice Brennan in his dissent in Volz.

To be sure, SSW is willing to accept, for purposes of this

discussion, that the contract interpretation given by the Court

of Appeal in Volt was correct and that the parties had

intended through their general choice-of-law provision for

section 1281.2(c) to apply. However, the recent decisions of

the California Supreme Court reveal a persistent practice of

abandoning the intention expressed by the parties and

applying California law, and particularly section 1281.2(c),

without regard to the parties’ clearly expressed intentions to

the contrary. In Cronus, the court specifically disregarded

the parties’ agreement that federe! law was to apply without

limitation by California law. Cronus, App. 31a, 39a-50a.. In

SSW, the court did not even engage the analysis of the

parties’ intent because (as shown in Cronus) California law

would apply irrespective of the parties’ agreement.

The analysis applied by the California Supreme Court

has resulted consistently in the decision that California law

was intended to apply so as to permit a stay of arbitration,

even though the FAA does not contemplate such a result.

That analysis simply cannot be regarded as a legitimate

exercise of state court contract construction. Rather, it is a

denigration of both contract rights as well as federal

arbitration rights.

However, the absence of principled contract

interpretation is not the basis for SSW’s prayer for judicial

review in this Petition. Rather, it is both permissible and

essential that the Supreme Court consider and review

California’s rule that defaults to California procedure

because such rule has the effect of nullifying federal rights.

The California courts now have rendered virtually

impossible the enforcement of an arbitration agreement

where there are related but non-arbitrable claims asserted by

one of the parties to the arbitration agreement. The court’s

analysis of the contract in Cronus confirms that parties

cannot, irrespective of the careful drafting of the agreement,

expect to enforce an arbitration agreement under the FAA

where they also specify any state’s substantive law to govern

their contract. Parties cannot do so because, according to the

court in Cronus, California’s section 1281.2(c) will supplant

the FAA’s requirement that litigation be stayed in order that

arbitration may proceed. Even more alarming is the fact that

this outcome is to be expected even if the parties’ contract

fails to mention California law but, instead, specifies another

state’s substantive law.

The consequence of California’s presumption of intent

and its default to California arbitration rules essentially

eviscerates the arbitration rights guaranteed by the FAA. At

the very least, this Court should grant certiorari in order to

establish whether the analysis being utilized by the

California courts is a permissible method of contract

interpretation under Volt. If so, parties engaged in interstate

commerce then will know that the FAA is subordinate to

California law and that, as a result, arbitration agreements

cannot be enforced if the terms of section i281.2(c) are

satisfied.

CONCLUSION

For the foregoing reasons, the petition for writ of

certiorari should be granted and the decisions below

reversed.

Dated this 15th day of September, 2005.

Respectfully submitted by:

KERRY L. KESTER MICHAEL E. LONDON

Counsel of Record MCINERNEY & DILLON, P.C.

JOEL D. HEUSINGER ONE KAISER PLAZA

KRISTA L. KESTER 18TH FLOOR

Woops & AITKEN, L.L.P. OAKLAND, CA 94612

SUITE 500 (510) 465-7100

301 SOUTH 13TH STREET

LINCOLN, NE 68508-2578

(402) 437-8500

Court of Appeal, First Appellate District,

Division Two — No. A097298

$120791

IN THE SUPREME COURT OF CALIFORNIA

En Banc

THE REGENTS OF THE UNIVERSITY OF

CALIFORNIA, Plaintiff and Respondent,

SSW INC. et al., Defendants and Appellants.

(Filed May 18, 2005)

In light of the decision in Cronus Investments, Inc. v.

Concierge Services (2005) 35 Cal.4th 376, review in the

above-entitled matter is dismissed. (Cal. Rules of Court,

rule 29.3(b).)

George

Chief Justice

Kennard

Associate Justice

Baxter

Associate Justice

Werdegar

Associate Justice

Chin

Associate Justice

Brown

Associate Justice

Moreno

Associate Justice

Court of Appeal, First Appellate District, Division Two —

Nos. A097298/A096947

$120791

IN THE SUPREME COURT OF CALIFORNIA

En Banc

THE REGENTS OF THE UNIVERSITY OF CALIFORNIA,

Plaintiff and Respondent,

Vv.

SSW INC. et al., Defendants and Appellants.

(Filed Jan. 28, 2004)

Petition for review GRANTED.

Further action in this matter is deferred pending

consideration and disposition of a related issue in Cronus

Investment Inc. v. Concierge Services LLC, 8116288 (see

Cal. Rules of Court, rule 28.2(c), or pending further order

of the court. Submission of additional briefing, pursuant to

California Rules of Court, rule 29.1, is deferred pending

further order of the court.

George, C.J., was absent and did not participate.

Werdegar

Acting Chief Justice

Kennard

Associate Justice

Baxter

Associate Justice

Chin

Associate Justice

Brown

Associate Justice

Moreno

Associate Justice

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts

and parties from citing or relying on opinions not

certified for publication or ordered published, except

as specified by rule 977(b). This opinion has not been

certified for publication or ordered published for

purposes of rule 977.

IN THE COURT OF APPEAL

OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION TWO

THE REGENTS OF THE

UNIVERSITY OF CALIFORNIA,

Plaintiff and Respondent,

A097298, A096947

Vv.

SSW, INC. et al.,

Defendants and Appellants.

(San Francisco County

Super. Ct. No. 304352)

INTRODUCTION

(Filed Oct. 24, 2003)

Tuthill Corporation (Tuthill) and SSW, Inc. (SSW)

appeal from an order of the San Francisco Superior Court

denying their petitions to compel arbitration of claims filed

against them by the Regents of the University of Califor-

nia (Regents). The trial court denied the petitions under

Code of Civil Procedure section 1281.2, subdivision (c)’

’ All statutory references are to the Code of Civil Procedure unless

otherwise indicated.

(hereafter section 1281.2(c)), which allows the court to stay

arbitration pending resolution of related litigations where

there is a possibility of conflicting rulings and contradictory

judgments. The court ruled that the contracting parties had

agreed that their arbitration agreement would be governed

and enforced by California law (including section 1281.2(c))

and that the Federal Arbitration Act (9 U.S.C. § 1 et seq.)

(FAA) did not preempt that state statute.

Tuthill and SSW contend that provisions of their

contracts - and particularly the choice-of-law provisions -

do not demonstrate an intention to make the contracts

subject to section 1281.2(c). Consequently, they argue that

the California statute is preempted by the FAA and that

the FAA requires enforcement of the arbitration agree-

ment despite the potential for conflicting results. We shall

affirm the order.

Facts and Procedural Background

In early 1994, the Regents contracted with Walsh

Construction Company (Walsh) for construction and

renovation of the Parnassus Central Utilities Plant at the

University of California at San Francisco. Tuthill and

SSW’ are out-of-state corporations who were subcontrac-

tors for the design and construction of heat recovery steam

generators, the steam turbine generator, and auxiliary

boilers on the cogeneration power plant project. After the

project was underway, Walsh’s parent company filed for

bankruptcy. Project sureties, Fidelity and Deposit Com-

pany of Maryland and Universal Underwriters Insurance

* SSW obtained or assumed the assets and liabilities of its predecessor

National Dynamics Corporation on June 23, 1998. For ease of reference,

SSW shall refer eather to SSW or to its predecessor National Dynamics.

Company, took assignment of Walsh's obligations and

rights under Walsh's contract with the Regents. In June

1999 the Regents filed suit against the sureties to recover

on the performance bond and alleged that Walsh ‘iad

failed to fulfill its obligations on the project. On June 8,

2001, the Regents amended their original complaint to

include causes of action against Tuthill and SSW based

upon the Regents’ status as a third party beneficiary to the

Walsh subcontracts and alleging numerous defects and

inadequate construction in the equipment designed, built,

or supplied by Tuthill and SSW.

The subcontracts between Walsh and Tuthill and

Walsh and SSW contained identical choice-of-law provi-

sions:

“Governing laws. This Contract Order shall] be gov-

erned by, construed, and enforced in accordance with the

laws of the State of California, exclusive of conflicts by

laws provisions.”

The arbitration provisions of the subcontracts were

also identical and provided:

“Arbitration: If the forgoing procedures do not resolve

the dispute, the dispute shall be decided by arbitration in

accordance with the Construction Industry Arbitration

Rules of the American Arbitration Association then pre-

vailing as supplemented by Sections 1282.6, 1283 and

1283.05 of the California Code of Civil Procedure, unless

the parties mutually agree otherwise. Selection of arbitra-

tors shall be in accordance with rules of the American

Arbitration Association. The Arbitrator(s) shall be bound

by, and apply California law. Each party hereto expresses

consent and agrees that any arbitration arising of or

relating to this Agreement, or the breach thereof, may, at

the option of either party, include by consolidation, joinder

or in any other manner, other persons involved in or

affected by such claim, dispute or other matter.... The

forgoing agreement to arbitrate ... shall be specifically

enforceabie under the prevailing Arbitration Law. The

award rendered by the Arbitrators shall be final, and

judgment may be entered upon it in accordance with

applicable law in any court having jurisdiction thereof. All

arbitration proceedings hereunder shall, unless all parties

hereto otherwise agree, be conducted in the County of San

Francisco.”

The prime contract between the Regents and Walsh

did not contain a mandatory arbitration provision.

Tuthill and SSW filed demurrers and petitions to

compel arbitration. The Regents opposed the petitions to

compel arbitration on the ground that the court should

exercise the discretion afforded it under section 1281.2(c)

to refuse to compel arbitration because of the potential for

inconsistent rulings if the controversy were adjudicated in

multiple forums. Tuthill and SSW responded that the

FAA, which gives the court no discretion to deny arbitra-

tion on such grounds, preempted section 1281.2(c). After

briefing and hearing before the Honorable Stuart Pollak,

the court denied the demurrers and the petitions to compel

arbitration. The court ruled that Volt Info. Sciences v.

Leland Stanford Jr. U. (1989) 489 U.S. 468, (Volt) con-

trolled. Accordingly, the court found that the parties to the

arbitration agreements had agreed that the subcontracts

not only would be “governed” by California law, but would

be “enforced” in accordance with California law, including

section 1281.2(c), and the FAA did not preempt California

law.”

Tuthill and SSW filed timely eppeals to the court's

order denying their petitions to compel arbitration.‘ On

April 15, 2002, we granted the Regents’ motion to consoli-

date the two appeals. After briefing was complete, the

parties requested that we defer disposition of the appeal

pending settlement. In May 2003, having been notified of

the failure of settlement negotiations, we returned the

case to the regular calendar.

Discussion

“Congress passed the FAA ‘to overcome courts’

refusals to enforce agreements to arbitrate.’ [Citations.]”

* In his order denying the petitions to arbitrate, Judge Pollak

reasoned:

“The Petitions to Compel Arbitration by SSW, Inc. and Tuthill

Corporation are DENIED. The rule enundated in Volt Information

Sciences v. Board of Trustees (1989) 489 U.S. 468 is still controlling, and

has been reaffirmed in the most recent decisions cited by the moving

parties. (£.g,, Hyundai America, Inc. v. Meissner & Wurst GMBH & Co.

(1998) 26 F Supp.2d 1217, 1219 (‘The Volt Court held that the FAA did

not preempt the California Arbitration Act's prevision allowing a court

te stay arbitraticn pending resolution of related litigation where the

parties had agreed that their arbitration agreement would be governed

by California law’). [ ] None of the other cases cited by the parties are to

the contrary. In the present case, the controlling contract explicitly

specifies not only that it shall be governed by California law, but that it

will be ‘enforced in accordance with the laws of the State of California.’

In this critical respect, the contract provision differs from the contract

language in Warren-Guthrie v. Health Net (2000) 84 Cal. App.4th 804

Since the subcontract is governed by California law, CCP section

1281.2(c) applies, and is not preempted.”

* An order dismissing a petition to compel arbitration is appealable

pursuant to section 1294.

(Mastrobuono v. Shearson Lehman Hutton, Inc. (1995) 514

US. 52, 55 (Mastrobuono); see also, Volt, supra, at p. 474.)

The federal statute was intended to place arbitration

agreements “‘upon the same footing as other con-

tracts. ...’” (Scherk v. Alberto-Culver Co. (1974) 417 U.S.

506, 511. As explained in Southland Corp. v. Keating

(1984) 465 U.S. 1, “the FAA not only ‘declared a national

policy favoring arbitration, but actually ‘withdrew the

power of the states to require a judicial forum for the

resolution of claims which the contracting parties agreed

to resolve by arbitration.’ 465 U.S., at 10.” (Mastrobuono,

supra, at p. 1216.) “State laws that apply to contracts

generally can be applied to arbitration agreements, but

‘[clourts may not ... invalidate arbitration agreements

under state laws applicable only to arbitration provisions.’

(Doctor’s Associates, Inc. v. Casarotto (1996) 517 U.S. 681,

687)” (Mount Diablo Medical Center v. Health Net of

California, Inc. (2002) 101 Cal. App.4th 711, 718 (Mount

Diabio).)

“Section 1281.2(c) authorizes the court to refuse to

enforce a contractual arbitration provision if arbitration

threatens to produce a result that may conflict with the

outcome of related litigation not subject to arbitration.”

(Mount Diablo, supra, at p. 717) The FAA contains no

* Section 1281.2 provides that on petition of a party to an artitra-

tion agreement, the court shall order the parties to arbitrate the

controversy “unless it 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 velated

transactions and there is a possibility of conflicting rulings on a

common issue of law or fact,” in which case “the court (1) may refuse to

enforce the arbitration agreement and may order intervention or

joinder of all parties iz a single action . . .; (2) may order intervention

or joinder as to all or only certain issues; (3) may order arbitration

(Continued on following page)

10a

similar provision. Nevertheless, in Volt, supra, 489 U.S.

468 (Volt), the United States Supreme Court held that

application of section 1281.2(c) is not pre-empted by the

FAA in cases “where the parties have agreed that their

arbitration agreement will be governed by the law of

California.” (Volt, supra, at p. 470; see also Mastrobuono,

supra, at p. 57.)

The Volt Court recognized that the primary purpose of

the FAA is to “ensure[ | that private agreements to arbi-

trate 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, enforc-

ing those rules according to the terms of the agreement is

fully consistent with the goals of the FAA, even if the

result is that the arbitration is stayed where the Act would

otherwise permit it to go forward.” (Id. at p. 479.)

Following Volt, California courts examine the underly-

ing contract containing the arbitration clause to determine

whether the parties have agreed to application of section

1281.2(c) to their agreement. (Mount Diablo, supra, at p.

717; Warren-Guthrie v. Health Net (2000) 84 Cal.App.4th

804, 808.) Consequently, the key issue in this case is

whether, by the choice-of-law and arbitration provisions of

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. .. .”

lla

the subcontracts, the parties agreed to application of

section 1281.2(c). This issue presents a question of law

subject to de novo review by this court. (Mount Diablo,

supra, at p. 717; Warren-Guthrie v. Health Net, supra, at p.

814; 24 Hour Fitness, Inc. v. Superior Court (1998) 66

Cal.App.4th 1199, 1212.)

The particular choice-of-law clause involved in Volt

provided that “‘[t}he Contract shall be governed by the law

of the place where the Project is located.” (/d. at p. 470.)

The California Court of Appeal concluded that by this

choice-of-law provision “the parties had incorporated the

California rules of arbitration, including § 1281.2(c), into

their arbitration agreement.” (Volt, supra, at p. 472.) “The

Supreme Court held that the parties had thereby ‘agreed

that arbitration would not proceed in situations which

fell within the scope of [section 1281.2(c))’ (Volt, supra, at

p. 475) and that the FAA did not prevent application of

this provision to stay the arbitration. U/d. at p. 477.)

‘[A]pplication of the California statute is not pre-e:npted

by the [FAA] in a case where the parties have agreed that

their arbitration agreement will be governed by the law

of California.’ (Jd. at p. 470.)” (Mount Diablo, supra, at

p. 719.)

The Regents contend, and the trial court agreed, that

Volt controls. Tuthill and SSW counter that the Supreme

Court in Volt did not itself determine whether the state

appellate court’s construction of the choice-of-law provision

in the contract was correct, but considered itself bound to

accept that court’s interpretation of the contract. (See Volt,

supra, at p. 474.) Tuthill and SSW rely instead upon the

later-decided Mastrobuono, supra, 514 U.S. 52 and upon

federal cases that have followed it, contending that the use

of a “generic” choice-of-law provision does not evince an

12a

intent by the parties to choose California arbitration law

in preference to federal arbitration law. Building upon

Mastrobuono, Tuthill and SSW contend that the arbitra-

tion clause and choice-of-law clause in the subcontracts

here did not incorporate section 1281.2(c); that section

1281.2(c) cannot be used to delay or avoid arbitration of a

contract dispute governed by the FAA; and that any

interpretation of the subcontracts to incorporate section

1281.2(c) results in ambiguity that must be resolved in

favor of arbitration.

Mastrobuono involved interpretation of a standard-

form contract between a securities brokerage firm and its

customers requiring arbitration, but which expressly

provided that “it ‘shall be governed by the laws of the

State of New York, ...” (/d. at p. 53.) New York law

allowed courts, but not arbitrators, to award punitive

damages. A pane! of arbitrators awarded punitive dam-

ages. A federa) district court and federal Court of Appeals

disallowed the punitive damages award. The Supreme

Court reversed, citing Volt. The choice-of-law provision

could reasonably be read in isolation to be “merely a

substitute for the conflict-of-laws analysis that otherwise

would determine what law to apply to disputes arising out

of the contractual relationship” (id. at p. 59) and New York

law would be pre-empted by the FAA because the provi-

sion did not show the parties’ intention to preclude the

award of punitive damages by arbitrators. The clause

might also be read to “include only New York’s substan-

tive rights and obligations, and not the State's allocation

of power between alternative tribunals.” (Jd. at p. 60.)

Consequently, the court concluded the clause was “not, in

itself, an unequivocal exclusion of punitive damages

claims.” (Jbid.) Rejecting a broader reading of the clause,

13a

the court refused to defer to the lower courts’ interpreta-

tion of the contract. Mastrobuono distinguished Volt, in

which the Supreme Court “deferred to the California

court’s construction of its own States law” on the grounds

that, in Mastrobuono, it was reviewing a lower federal

court’s interpretation of the contract and the only defer-

ence arguably called for was to the arbitrator. (Mastro-

buono, supra, at p. 60, fn. 4.) The Mastrobuono majority

then contrasted the choice-of-law provision with the

arbitration provision which authorized arbitration in

accordance with NASD rules, and “strongly implie/[d]” that

arbitrators might appropriately award punitive damages.

Ud. at pp. 60-61.) The court reasoned that the choice-of-

law clause at most, “introduces an ambiguity into an

arbitration agreement that would otherwise allow punitive

damages. As we pointed out in Volt, when a court inter-

prets 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 arbitra-

tion clause itself resolved in favor of arbitration.’ 489 U.S.,

at 476....” Ud. at p. 62.) Finally, the court concluded 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. In contrast, respondents’

reading sets up the two clauses in conflict with another:

one foreclosing punitive damages, the other allowing them.

This interpretation is untenable.” (/d. at pp. 63-64.)

l4a

Considering itself “bound by Mastrobuono,” the Ninth

Circuit in Wolsey, Lid. v. Foodmaker, Inc. (9th Cir.1998)

144 F.3d 1205 (Wolsey), held that a choice-of-law clause

providing that “‘[t}his Agreement ... shall be interpreted

and construed under the laws of the State of California,

U.S.A." did not incorporate section 1281.2(c). (Jd. at p.

1213.) Wolsey read Mastrobuono as dictating that generic

choice-of-law clauses do not incorporate state procedural

rules governing the allocation of authority between courts

and arbitrators. (Wolsey, supra, at pp. 1212-1213.) It

determined the choice-of-law clause before it was “general”

and did not contain a specific reference to the state arbi-

tration rule at issue. (Jd. at p. 1212.) Therefore, it pro-

ceeded to determine “whether section 1281.2(c) is a

‘substantive principle that [California] courts would apply’

or is instead ‘a special rule( | limiting the authority of

arbitrators.” (Jbid.) Wolsey concluded that section

1281.2(c) did not affect “‘only [California’s] substantive

rights and obligations,’” but affects (California’s) alloca-

tion of power between alternative tribunals.’ (Citation.) It

therefore reversed the district court’s refusal to compel

arbitration. (/d. at p. 1213.)

In Mount Diablo, supra, 101 Cal.App.4th 711, an

opinion published after briefing was completed in this

case, another division of this court wrestled with “‘the

thorny question of contract construction raised by the

generic choice-of-law clause’ in an agreement calling for

the resolution of disputes by arbitration.[*)” (Jd. at p. 714.)

* “Note, An Unnecessary Choice of Law: Volt, Mastrobuono, and

Federal Arbitration Act Preemption (2002) 115 Harv.L.Rev. 2260,

2261... .

15a

In a comprehensive’ ard thoughtful opinion, former Judge,

now Justice Pollak, distinguished Mastrobuono and

disagreed “with the implicit determination in Wolsey that

section 1281.2(c) is ‘“a special rule( | limiting the authority

of arbitrators”’ [citation], as was the New York rule

involved in Mastrobuono.” (Mount Diablo, supra, at p.

725.) Justice Pollak explained that “[t/his view contradicts

the characterization of section 1281.2(c) by the Supreme

Court itself not only in Volt. . . . (Volt, supra, 489 U.S. at p.

476, fn. 5) but in the subsequent decision in Doctor's

Associates, Inc. v. Casarotto, supra, 517 U.S. 681. In

rejecting a Montana statute requiring arbitration agree-

ments to contain a particular form of notice in order to be

enforceable, the Supreme Court contrasted that statute

with section 1281.2(c): “The state rule examined in Voit

determined only the efficient order of proceedings; it did

not affect the enforceability of the arbitration agreement

itself. We held that applying the state rule would not

“undermine the goals and policies of the FAA,” jcitation],

because the very purpose of the Act was to “ensur[e] that

private agreements to arbitrate are enforced according to

their terms.’ (517 U.S. at p. 688; [citation].)” (Mount

Diablo, supra, at pp. 725-726.)

Mount Diablo rebuffed the attempt to lump all choice-

of-law clauses that do not explicitly reference arbitration

under the rubric “generic,” recognizing that “the term has

no precise definition” and pointing out that if such “ge-

neric” provision were insufficient (o incorporate state law

" Observing that [tlhe decisions in Volt and Mastrobuono have

given rise to a good bit of commentary as well as criticism” (id at p.

720), the Mount Diablo opinion canvasses that commentary (/d at pp.

720-721, and fn. 7)

l6a

regarding the enforcement of arbitration agreements

without further elaborating the specific provisions of state

law to which it applies, such a redundancy would also

logically be required of other provisions incorporated by

choice-of-law clauses, “e.g., provisions treating indemnifi-

cation rights or termination events in contracts involving

the interstate transportation of products.’ [Citation.)” (Jd.

at p. 722.)

Therefore, Mount Diablo rejected a “‘default rule’ that

‘a generic choice-of-law clause, standing alone, is insuffi-

cient to support a finding that contracting parties in-

tended to opt out of the FAA’s default standards.’

[Citation.)” (Jd. at p. 721.) Rather than requiring “‘extrin-

sic evidence of the parties’ intent to contract out of the

FAA's default regime’” or an express reference to particu-

lar state statutes which the parties intend to incorporate

into their agreement, Mount Diablo followed the tradi-

tional approach of attempting to discern the intention of

the parties from the language of the agreement, affirming

that the “starting point in the interpretation of the choice-

of-law clause, like any contractual provision, is with the

language of the contract itself.” (/d. at p. 722.) In under-

taking to discern the parties’ intentions from the language

of the agreements, the Mount Diablo court “agree({d] with

the observation of the concurring judge in Roadway

Package (System, Inc. v. Kayser (3d Cir.2001) 257 F.3d 287,

cert. den.],.. . that ‘[t}he choice-of-law almost invariably is

meant to encompass the entire agreement’ (id. at p. 308.)”

Ud. at p. 722.)

The broad choice-of-law clause in Mount Diablo

provided that “‘[t}he validity, construction, interpretation

and enforcement of this Agreement’ shall be governed by

California law.” (/d. at p. 722 italics added.) Although the

17a

clause was “generic” in the sense that it does not mention

arbitration or any other specific issue that might become a

subject of controversy” (id. at p. 722), it was “nonetheless

broad, unqualified and all encompassing. ... The explicit

reference to enforcement reasonably includes such matters

as whether proceedings to enforce the agreement shall

occur in court or before an arbitrator.” (Jd. at p. 722.)

Moreover, only a “strained” reading of this broad choice-of-

law provision could exclude reference to the chapter in

which section 1281.2 appears, Chapter 2 of title 9 of part

III of the Code of Civil Procedure, titled “Enforcement of

Arbitration Agreements.” (Jbid.)

Mount Diablo contrasted this broad and unqualified

provision with the choice-of-law provision of the agree-

ment in Mastrobuono, which provided only that it ‘“shall

be governed by the laws of the State of New York.”’

[Citation.)” (Mount Diablo, supra, at p. 723.) Mount Diablo

also contrasted the choice-of-law provision in the agree-

ment before it with that interpreted by the California

appellate court in Warren-Guthrie v. Health Net, supra, 84

Cal.App.4th 804 (Warren-Guthrie), providing only that

“{aJll Arbitration shall be conducted in accordance with the

California Code of Civil Procedure, commencing with

Section 1280.” (Id. at p. 815, italics added; Mount Diablo,

supra, at p. 723.)

Based on the narrow language of that choice-of-law

clause, Warren-Guthrie concluded that the parties had not

agreed that the enforceability of the arbitration agreement

would be determined by California law. (Warren-Guthrie at

pp. 815-816.) While reaffirming Vo/t’s holding that a

petition to compel arbitration may be denied pursuant to

section 1281.2, where the parties have agreed to applica-

tion of California law for this purpose, Warren-Guthrie

18a

focused upon the use of the term “conducted” in the nar-

row choice-of-law provision before it, reasoning: “There is

no express language indicating that California law shall

be determinative as to whether or not arbitration is

required. Unlike in Volt, the parties did not agree that

California law shall apply for all purposes. Rather, the

agreement limits application of California law to Califor-

nia contractual arbitration law, and further limits the

scope of California law to that pertaining to the manner in

which the arbitration is to be conducted.” (/d. at p. 815.)

The “key term” of the choice-of-law provision was “con-

ducted” (ibid.), leading Warren-Guthrie to conclude that

“[aljgreement to apply California contractual arbitration

law is expressly limited to that law which bears on how

the arbitration shall be conducted, as distinguished from

agreeing the plan shall be governed by California law for

all purposes, including the determination as whether or

not arbitration is required. There being no such express

language to the contrary, and in light of the overriding

state and federal policy of enforcing privately negotiated

agreements to arbitrate in accordance with their terms

[citations],” the court concluded that the choice-of-law

provision “does not allow nonarbitration based on the

section 1281.2(c) exception to arbitration. [Citation.]” (/d.,

at p. 816.)

In reconciling the disparate authorities, the Mount

Diablo court emphasized the difference in language of the

various choice-of-law clauses being construed, pointing

out that several of the federal cases following Mastro-

buono “contain choice-of-law provisions that use language

similar to that in Mastrobuono and Wolsey, to the effect

that the agreement would be governed by the law of a

particular jurisdiction, without reference to enforcement.

19a

[Citations.]” Ud. at p. 723.) The significance of this differ-

ence in language was recognized in Warren-Guthrie, supra,

and by the Court of Appeals of New York in Smith Barney,

etc. v. Luckie (1995) 85 N.Y.2d 193.) Ud. at p. 724 [lan-

guage that New York law governs the agreement and its

enforcement indicates intent to arbitrate to the extent

allowed by New York law, even if applicatica of state law

would relieve parties of their responsibility under the

contract to arbitrate].) (Mount Diablo, supra, at p. 724.)

Having determined that the language of the choice-of-

law clause before it was “unquestionably” “broad enough

to include state law on the subject of arbitrability,” Mount

Diablo proceeded to analyze “whether the particular

provision of state law in question is one that reflects a

hostility to the enforcement of arbitration agreements that

the FAA was designed to overcome. If so, the choice-of-law

clause should not be construed to incorporate such a

provision, at least in the absence of unambiguous !an-

guage in the contract making the intention to do so unmis-

takably clear. In Mastrobuono itself, the state law in

question would have denied an arbitrator the ability to

award the same relief as a court, and the Supreme Court

held that the ambiguity in the contract should be resolved

by reading the choice-of-law clause ‘not to include special

rules limiting the authority of arbitrators.’ (Mastrobuono,

supra, 514 U.S. at p. 64... .)” Ud. at p. 724.) Cases con-

cluding application of state law would contravene the FAA,

often involved state rules, like the New York rule in

Mastrobuono, that “tended to restrict rather than to

facilitate the use of arbitration....” (Jd. at p. 725.) In

contrast, “where the state arbitration provision is not

inconsistent with the FAA policy of enforcing arbitration

procedures chosen by the parties, choice-of-law clauses

20a

making no explicit reference to arbitration commonly have

been interpreted to incorporate the state’s law governing

the enforcement of arbitration agreements. [(Citations.]”

(Id. at p. 725.)

Mount Diablo recognized that section 1281.2(c) 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 circum-

stances — in order to avoid potential inconsistency in

outcome as well as duplication of effort — does not contra-

vene the letter or the spirit of the FAA. That was the

explicit holding in Volt and nothing in Mastrobuono casts

doubt on that conclusion.” (/d. at p. 726.) Mount Diablo

therefore concluded that section 1281.2(c) was not de-

signed to discourage the use of arbitration or to limit the

rights of parties choosing to arbitrate. (Ibid. )

Having determined that the language of the choice-of-

law provision was broad enough to incorporate section

1281.2(c) and that the statute did not reflect a hostility to

the enforcement of arbitration agreements and was not

inconsistent with the FAA policy of enforcing arbitration

procedures chosen by the parties, Mount Diablo affirmed

the superior court order denying the petition to compel

erbitration. (Jd. at pp. 724-727.)

The choice-of-law clause in the case before us is of

similar breadth to that interpreted in Mount Diablo,

providing that the contract “shall be governed by, con-

strued, and enforced in accordance with the laws of the

2la

State of California, exclusive of conflicts by laws provi-

sions.” (Italics added.) We agree with Mount Diablo, that

such broad language — particularly use of the term “en-

forced” evinces the intention of the parties to apply Cali-

fornia law (including section 1281.2(c)) to enforcement of

the agreement.

Nothing in the arbitration clause itself is inconsistent

with our reading of the choice-of-law clause presented

here. Tuthill and SSW contend that the specific references

to other sections of California’s arbitration law, specifically

sections 1282.6 [issuance of subpoenas], 1283 [deposi-

tions], and 1283.05 [manner of taking depositions], dem-

onstrate an intent to exclude other provisions not

specifically mentioned, including section 1281.2(c). We

disagree. These particular code sections are included in

the arbitration clause itself, which sets forth the rules by

which the arbitration is to be conducted. That clause

provides for arbitration in accordance “with the Construc-

tion Industry Arbitration Rules of the American Arbitra-

tion Association then prevailing as supplemented by

sections 1282.6, 1283 and 1283.05....” Specifying the

particular rules under which the arbitration is to be

conducted does not conflict with the parties’ choice of

California law to govern how the agreement is enforced.

(See Warren-Guthrie, supra, at p. 815; Mount Diablo,

supra, at pp. 723-724.) The subcontracts clearly require

that they be “enforced” according to California law and we

construe them to incorporate section 1281.2(c). Nothing in

the arbitration provision or any other provision of the

subcontracts conflicts with this choice-of-law or creates an

“ambiguity” which must be resolved in favor of FAA pre-

emption of section 1281.2(c). (See Moses H. Cone Hospital v.

Mercury Constr. Corp. (1983) 460 U.S. 1, 24-25.)

' 22a

Nor do we find Mastrobuono requires a different

result. As Mount Diablo explains, the circumstances in

that case were very different from those involved in the

present case. The choice-of-law clause at issue in Mastro-

buono was considerably narrower than that present here.

Moreover, the New York arbitration law at issue in Mas-

trobuono “would have denied an arbitrator the ability to

award the same relief as a court” in contravention of the

FAA and it tended to restrict the use of arbitration. In

contrast, section 1281.2(c) is not inimical to or discourag-

ing of arbitration, but rather “is part of California’s statu-

tory scheme designed to enforce the parties’ arbitration

agreemenis, as the FAA requires.” (Mount Diablo, supra,

at p. 726.) The statute addresses a particular problem

arising in when an arbitrable controversy affects claims by

or against others not bound by the arbitration agreement.

By giving the trial court discretion not to compel arbitra-

tion in order to avoid potential inconsistency in outcome

and duplication of effort, section 1281.2(c) contravenes

neither the letter nor the spirit of the FAA. (Mount Diablo,

supra, at p. 726.)

SSW relies extensively upon Energy Group, Inc. v.

Liddington (1987) 192 Cal.App.3d 1520 which held that

section 1281.2(c) applied only to contracts subject to

arbitration and was therefore preempted by the FAA to the

extent it was used to avoid or delay arbitration. (Jd. at pp.

1522, 1528.) The case predates Volt and the court did not

undertake to interpret the contract to determine whether

the parties intended to incorporate section 1281.2(c) Volz,

Mastrobuono, and subsequent cases have rendered its

analysis obsolete. We agree with the analysis of Mount

Diablo and reiterate the observation of the Supreme Court

in Volt that California’s arbitration laws generally foster

23a

the goals of the FAA and that “California has taken the

lead in fashioning a legislative response to this problem [of

multiparty contractual disputes leading to potentially

inconsistent rulings and contradictory judgments)... .”

(Volt, supra, 489 U.S. at p. 476, fn. 5.) Insofar as Warren-

Guthrie, supra, and Energy Group, Inc. v. Liddington,

supra, could be viewed as supporting the proposition that

the FAA bars the operation of section 1281.2(c) solely

beceuse it constitutes a special rule for arbitration, with-

out examining the roots of the rule, we believe they were

wrongly decided.

In summary, the subcontracts call for arbitration of

disputes. By providing in a broad conflict-of-law clause

that the contract “shall be governed by, construed, and

enforced in accordance with the laws of the State of

California, exclusive of conflicts by laws provisions,” the

parties to the subcontracts demonstrated an intention to

incorporate section 1281.2(c) and thus agreed to allow a

court to stay arbitration in situations falling within the

scope c that statute. As the Supreme Court recognized in

Volt, section 1281.2(c) is not hostile to the goals and

policies of the FAA, and the FAA does not preempt the

statute in these circumstances. (Id. at p. 1324.)

Disposition

The order denying Tuthill and SSW’s petition to

compel arbitration is affirmed. Regents shall recover costs

on appeal.

Kline, PJ.

We concur:

Haerle, J.

Lambden, J.

25a

SUPERIOR COURT OF THE STATE OF CALIFORNIA

COUNTY OF SAN FRANCISCO

DEPARTMENT NUMBER 304

THE REGENTS OF

THE UNIVERSITY

OF CALIFORNIA, a

California State agency,

Plaintiff,

vs.

FIDELITY AND

DEPOSIT COMPANY

OF MARYLAND, et al.,

Defendants.

NO. 304352

)

ORDER DENYING

PETITIONS TO

) ARBITRATE

) The Honorable

) Stuart R. Pollak

)

(Filed Oct. 15, 2001)

The Petitions to Compel Arbitration by SSW, Inc. and

Tuthill Corporation are DENIED. The rule enunciated in

Volt Information Sciences v. Board of Trustees (1989) 489

U.S. 468 is still controlling, and has been reaffirmed in the

more recent decisions cited by the moving parties. (£.z.,

Hundai America, Inc. v. Meissner & Wurst GMBH & Co.

(1998) 26 F.Supp. 2d 1217, 1219 (“The Volt Court held that

the FAA did not preempt the California Arbitration Act's

provision allowing a court to stay arbitration pending

resolution of related litigation where the parties had

agreed that their arbitration agreement would be gov-

erned by California law.”)) None of the other cases cited by

the moving parties ure te the contrary. In the present case,

the controlling contract explicitly specifies not only that it

shall be governed by California law, but that it will be

“enforced in accordance with the laws of the State of

California.” In this critical respect, the contract provision

differs from the contract language in Warren-Guthrie v.

26a

Health Net (2000) 84 Cal.App.4th 804. Since the subcon-

tract is governed by California law, CCP section 1281.2(c)

applies, and is not preempted.

Dated: 10/15/01 /s/ Stuart R. Pollak

STUART R. POLLAK

Judge of the Superior Court

27a

IN THE SUPREME COURT OF CALIFORNIA

CRONUS INVESTMENTS, INC.,

Plaintiff, Cross-defendant

and Appellant;

HOWARD JON COLMAN,

)

Cross-defendant and )

Appellant,

v. )

)

$116288

Los Angeles County

Super. Ct. No. LC060095

CONCIERGE SERVICES, (Filed 3/10/05)

Defendant, Cross-complainant

and Respondents;

WESTREC MARINA

MANAGEMENT, INC., et al.,

Defendants and Respondents.

Code of Civil Procedure section 1281.2, subdivision (c)’

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 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

' Except as otherwise noted, all further statutory references are to

the Code of Civil Procedure.

28a

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 (Concierye).

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 agree-

ments: (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.

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,

29a

performance or breach of this Agreement... .~ The arbi-

tration clause further specifies that: “The designation of a

situs or specifically a governing law for this agreement or

the arbitration shal! not be deemed an election to preclude

application of the [FAA], if it would be applicable.” The

agreements also contained a choice-of-law clause providing

that: “[t}his agreement shal] 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 We-

strec), Michael M. Sachs (chief executive officer of We-

strec), and William W. Anderson and Michael P. Robbins

* The LLC and guaranty agreements did not contain arbitration

provisions

* Tne 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 besed on

contract, tort of 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 eward ren-

dered 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 shal) be determined by the arbitrator

The parties intend that this agreement to arbitrate be valid, specifically

enforceabw 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 precluije application of the [FAA], if it would be applica-

ble.”

30a

(principals in Westrec). The complaint asserted claims for

breach of contract, breach of fiduciary duty, conversion and

fraud. After Cronus filed its complaint, Colman and

Cronus submitted a demand for arbitration to the Ameri-

ean Arbitration Association (AAA) under the arbitration

clauses in the underlying agreements.

Concierge then filed a cross-complaint against Col-

man, 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 arbitra-

tion 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 over-

lapping issues of fact and law. To avoid the possibility of

contradictory outcomes and promote efficiency in the

Sla

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” 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. (aX6)) 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 applica-

tion.

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 in-

tended 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

32a

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: [{) .. . (4)

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 determina-

tion, 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 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 enforce-

ment 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 arbitra-

tion 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

33a

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 ambigu-

ity 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

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 involv-

ing commerce to settle by arbitration a controversy

thereafter arising ... shall be valid, irrevocable, and

34a

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, notwith-

standing 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 Consir.

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 arbitra-

bility.” (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. (Rosen-

thal 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

agreements. (See, eg., 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

35a

(1995) 514 U.S. 938, 944 [state law principles governing

formation of contracts generally apply in deciding arbitra-

bility issue]; Allied-Bruce Terminix Cos. v. Dobson (1995)

513 U.S. 265, 281 ["“States may regulate contracts, includ-

ing arbitration clauses, under general contract law princi-

ples... .”).) “(Tithe federal policy is simply to ensure the

enforceability, according to their terms, of private agree-

ments 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 US. 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 accom-

plishment and execution of the full purposes and objec-

tives of Congress.” [Citation.]” (Volt, supra, 489 U.S. at p.

477.)

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 US. at

p. 16 & fm. 10 [FAA preempted California statute tat

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, revoca-

bility, 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 st ate law conditioned the enforceability of arbi-

tration agreements on a notice requirement not applicable

to contracts generally. (Doctor's Associates, supra, 517 US.

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 US. at p. 687.)

37a

In addition, the FAA establishes a prophylactic rule

governing ambiguities ir arbitration clauses. Section 2 of

the FAA (9 U.S.C. §2), applicable to any arbitration

agreement within the ccverage of the Act, requires that

“questions of 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 ambigui-

ties as to the scope of the arbitration clause itself should

be resolved in favor of arbitration. (Jd. 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 the breach thereof.’” The

contract also contained a choice-of-lew provision that the

contract “‘shall be governed by the law of the place where

the Project is located,’” which was California. After dis-

putes arose, Volt demanded arbitrat.on. 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 arbitra-

tion 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.)

38a

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 con-

tracts 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 laws, includ-

ing 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. (Volz,

supra, 489 U.S. at pp. 470, 477-479.) “There is no federal

policy favoring arbitration under a certain set of proce-

dural rules; the federal policy is simply to ensure the

enforceability, according to their terms, of private agree-

ments to arbitrate.” (/d. 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.

39a

Mount Diablo Medical Center v. Health Net of Cali-

fornia, 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’ shal! be governed by California law. The

explicit reference to enforcement reasonably includes

such matters as whether proceedings to enforce the

agreement shal] 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 Procedure is captioned

‘Enforcement of Arbitration Agreements.’ An interpreta-

tion of the cheice-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 arbitra-

tion into the contract. However, the contracts at issue in

Mount Diablo and Voit 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 nulli-

fied “only where the FAA's provisions are inconsistent with

40a

the CAA.” Respondents contend that the procedural rules

of section 1281.2(c) do not conflict with the FAA's proce-

dural provisions — vecause they do not apply in state court

~ or with its substantive provision (9 U.S.C. § 2). Appel-

lants 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, never-

theless, 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 arbitration. (9 U.S.C. § 3.) Section 4 of

the FAA concerns petitions for enforcement of an arbitra-

tion 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.)

* 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

artitration under an agreement in writing for such arbitration, the

court in whech such suit is pending, upon being satisfied that the issue

involved in such sult or proceeding is referable to arbitration under

such an agreement, shall on application of ome 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 ”

* 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 artwtration may petition any United States distnet court

whach, save for such agreement, would have jurisdiction under Title 28,

ip a civil action or in admiralty of the subject matter of « suit arising

(Continued on following page)

4la

The language used in sections 3 and 4 and the legisla-

tive history of the FAA suggest that the sections were

intended to apply only in federal court proceedings. Sec-

tion 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 in-

tended to limit the application of the section to federal

42a

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 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 proce-

dures for the enforcement of arbitration agreements.’

* The House of Representatives’ report on the FAA noted: “ ‘This

bili 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, 66th Cong., lst Seas., 1-2 (1924).” (Byrd,

supra, 470 U.S. at p. 220, fn. 6.) After the enactment of the FAA, the

(Continued on following page)

43a

Thus, the identical phrasing in the FAA's original proce-

dural 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 ccurts.

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 pro-

ceedings.” (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 proceedings in federal court

{citations}, are nonetheless applicable in state court.” (Volz,

supra, 489 U.S. at p. 477, fn. 6.) Reaffirming Volt’s distinc-

tion 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 agree-

ment itself.” ‘Doctor’s Associates, supra, 517 U.S. at p.

688.)

American Bar Association, which had participated in drafting the

legislation, stated that “(tihe 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.AJ. 153, 154.)

44a

Finally, our interpretation that the procedural provi-

sions of the FAA and section 1281.2 do not conflict is

consistent with our prior decision in Rosenthal. (Rosen-

thal, 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. (Rosen-

thal. 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 proce-

dural rules, therefore, ‘the procedural provisions of the

[FAA] are not binding on state courts .. . provided appli-

cable state procedures iv not defeat the rights granted by

Congress.’ (Citation.]” (Rosenthal, supra, 14 Cal.4th at p.

409.) “Our statutes do establish procedures for determin-

ing enforceability not applicable to contracts generally,

but they do nct thereby run afoul of the [FAA's] section 2,

which states the principle of equa] enforceability, but

does not dictate the procedures for determining enforce-

ability.” (Rosenthal, supra, 14 Cal.4th at p. 410.)

45a

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 arbitra-

tion where, as here, the parties have agreed to arbitrate in

accordance with California law”}.)

Similarly, in Byrd and Moses H. Cone (federal diver-

sity 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 arbitra-

tion 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 arbitra-

tion 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 US. at

p. 220, fn. 6.) Also relying on the procedural rules of the

FAA, Moses H. Cone held that the federal district court

46a

erred in staying the federal court action seeking an order

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 arbitra-

tion agreements. They argue that, under the rule of liberal

construction set forth ia 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 lan-

guage 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: “Interpret-

ing 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 con-

struction set forth in Moses H. Cone, nor does it offend any

47a

other policy embodied in the FAA.” (Volt, supra, 489 U.S.

at p. 476 italics added.) The court further stated: “[Wle

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 practical problems that arise in multiparty con-

tractual 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 arbitra-

tion proceedings in these situations in order to minimize

the potential for contradictory judgments. See Calif. Civ.

Proc.Code Ann. § 1281.2(c).” Ud. 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 princi-

ple. ([bid.)

In contrast, the high court, in Mastrouono 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.”” Ud. at p. 53.) The arbitration provision

48a

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).’

A panel of arbitrators awarded punitive damages, but a

federal district court and federal Court of Appeal disal-

lowed the award. (Mastrobuono, supra, at pp. 54-55.)

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 arbitra-

tion 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 ambiguitie<

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, wnile the arbitration

clause covers arbitration; neither sentence intrudes upon

the other.” (Jd. 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

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

49a

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.)

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 com-

mon issues of fact and law amongst interrelated parties.

Moreover, “[slection 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 circum-

stances — in order to avoid potential inconsistency in

outcome as well as duplication of effort — does not contra-

vene the letter or the spirit of the FAA. That was the

explicit holding in Volt and nothing in Mastrobuoro casts

50a

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)."

Our opinion does not preclude parties to an arbitra-

tion agreement to expressly designate that any arbitration

proceeding should move forward under the FAA's proce-

dural 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 doer not conflict with

the applicable provisions of the FAA and does not under-

mine 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 decline to follow Wolsey, Lid. vu. Foodmaker, Inc. (9th Cir.

1998) 144 F.3d 1205 im 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.

WE CONCUR:

GEORGE, C.J.

KENNARD, J.

BAXTER, J.

WERDEGAR, J.

BROWN, J.

MORENO, J.

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