Statutorily approved arbitration clauses could provide relief

Parties challenging arbitration continue to flood the courts with objections to enforcing the terms of an arbitration clause. Despite comprehensive arbitration clauses written in an attempt to disclose every facet of this alternative to litigation, California courts nevertheless find tenuous grounds for refusing to enforce arbitration. In Mayers v.Volt Mgmt. Corp., 203 Cal. App.4th 1194 (2012), and Samaniego v. Empire Today LLC., 2012 WL 1591 847, the court, citing Civil Code Section 1670.5 prohibiting unconscionable contract clauses, denied a petition to compel arbitration on grounds the employer failed to provide the employees with a copy of American Arbitration Association Rules.

Yet other arbitration clauses are questionable, often exemplified in employment and consumer cases or in other contexts involving non-negotiated contracts between parties with disproportionate bargaining power, or the terms favor only one party. "Unconscionable" arbitration clauses in adhesive contracts have generated innumerable objections to arbitration.

The state Supreme Court divided the doctrine of unconscionability into two subdivisions entitled substantive and procedural arbitration clauses, and imported a sliding scale of importance to each category. Armendariz v. Health Psychare Services, 24 Cal.4th 93 (2000). This characterization allowed judges to impose their own subjective analysis of arbitration clauses applicable to an infinite variety of facts untethered to any objective standard. Consequently, counsel must sort out the different appellate interpretations of an ambiguous and vacuous concept inherently destined for appeal. Because "bright lines" applicable to this doctrine are impossible, a hodgepodge of appellate opinions exists.

The Legislature needs to review California law on arbitration and consider amending the CCP to provide a "safe harbor" for all parties in arbitration clauses. The model for change is CCP Section 1295, a statutorily approved arbitration clause applicable to contracts for medical services, and prohibiting any civil action alleging professional negligence against the provider. By statutory definition, a CCP Section 1295 arbitration clause is not adhesive. Statutory confirmation of a specific legislative format in other categories of disputes can serve the same purpose.

Legislatively confirming a uniform public policy supporting arbitration, simultaneously replicating the format of CCP Section 1295, avoids the recurring intervention of the Supreme Court in condemning state court circumvention of the Federal Arbitration Act (9 U.S.C. Sections 1-16) and its preemptive scope. Supreme Court cases have overruled state courts attempting to either finesse or reject application of the FAA. AT&T LLC v. Concepcion, 141 S.Ct. 1740 (2011); Marmet Health Care Center v. Brown, 132 S.Ct. 1261 (2012). California legislatively approved arbitration is strengthened when a statute orders arbitration contingent on the drafting party including an approved form arbitration clause.

The recommendation to enact statutory approval of arbitration clauses does not end the criticism of arbitration as a format for dispute resolution, but removes the endless judicial review of arbitrable terms. In employment cases, for example, an arbitration clause setting forth minimum standards for employees who arbitrate disputes with an employer is as equally applicable to statutory resolution as CCP Section 1295. The fundamental language of the statute would apply specifically to employment contracts and assure protection for all parties. At a minimum, a rough draft of the statute would include the conditions imposed on employers by the state Supreme Court in Armendariz.

A legislative effort to draft a CCP Section 1295 format could expand to any other industry, entity or enterprise, e.g., health insurance services; franchises; real estate transactions; elder care. Each category differs, and the language of the statute would conform to the interests of all parties concerned. The Legislature can discuss alternative language with the relevant parties in an attempt to achieve accord. Compromise is inevitable but a reasoned and fairly balanced arbitration clause can respond to the interests of all sides.

To further reduce challenges to arbitration and eliminate the attendant cost of judicial intervention, the Legislature should consider reformulation of the arbitration process without impeding its effectiveness. The FAA clearly applies to disputes in "transactions and contracts" occurring within interstate commerce (Perry v. Thomas, 482 U.S. 483 (1987)), and any arbitration clause is unenforceable if the terms violate principles of "law and equity for the revocation of any contract." 9.U.S.C. Section 2. In the 1995 Supreme Court decision of First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), the justices decided the FAA required division of jurisdiction between the judiciary and the arbitrator in determining whether to enforce an arbitration clause.

Under the rubric of "arbitrability," the First Options decision held the trial judge decides whether the arbitration clause is either enforceable or violates contract principles of law and equity. Contingent on a court ruling enforcing the arbitration clause, the arbitrator subsequently resolves the merits of the dispute. As a result of First Options, the world of contract law dominates resolution of arbitration clauses on grounds similar to the merits of the dispute.

California has endorsed the division of authority between judge and arbitrator although the statutory language differs in that the court may refuse to order arbitration if "[grounds] exist for the revocation of the agreement." That phrase also embraces contract law authorizing the court to decide enforcement of the "agreement." Rosenthal v. Great Western Fin. Securities Corp., 14 Cal.4th 394 (1996).

The Supreme Court has incrementally expanded the scope of the FAA and preempted state court decisions in conflict with the federal statute, but invoking either version of the federal or state statutory language implies application of contract law, i.e., breach of contract, implied covenant of good faith and fair dealing, fraud, and punitive damages. The ultimate effect "litigasizes" arbitration clauses by incorporating an infinite variety of challenges applicable to unrelated issues or subject matter collateral to contract law.

Accordingly, within the role of "arbitrability" the California courts have included procedural issues indigenous to litigation. Waiver (of the right to file petitions to compel arbitration); signatories compelling non signatories to participate in the arbitration and vice versa (agency; alter ego; third party beneficiaries); collateral estoppel; res judicata; arbitrable and non arbitrable claims (consolidation and severance); discovery; recusal and disqualification; costs and fees; mandamus; injunctions; choice of law; choice of forum; and appeal.

These categories both apply to adhesive and negotiated arbitration clauses, but several relate marginally to contract based law. Not all are capable of resolution by a standard arbitration form but the CCP already has attempted some statutory resolution. CCP Sections 1281.2 and 1281.3; Bush v. Horizon West, 2012 WL 1492 841. Incorporating substantive contract law in resolving the validity of arbitration clauses, coupled with unrelated litigation categories, has forced the courts to devote an inordinate amount of time in deciding collateral issues of arbitration. A partial solution exists by reconsideration of extant statutory principles. Examples include drafting standards for submitting motions for summary judgments during arbitration CCP Section 437(c); choice of law and choice of forum restrictions; mandamus costs imposed on the non-prevailing party.

The Legislature could reduce the expense of judicially arguing issues of "waiver" of the right to arbitrate by timely mandating notification to the other party an arbitration clause exists. Lewis v. Fletcher Jones Motor Cars, 2012 WL 1416714. In the alternative, enacting a court Rule to require a party to demand arbitration within 90 days of receipt of service of the complaint or forfeit the right to arbitrate unless the other party agrees to waive the date.

Another court Rule in contested cases could require the complaint to serve as the statement of issues in the arbitration, and the cross complaint or counter claim serve as the issue(s) for the other party. This Rule eliminates the necessity of submitting additional papers with the arbitrator and simultaneously assures each party that all arbitrable issues are identical with the pleadings.

Another option for improving the arbitration process involves service providers. All providers write their own Rules but the content is roughly comparable. Providers could initiate an arbitration conference to craft a uniform set of Rules universally applicable with provision for provisions for amendment. Arbitration service providers could furnish these Rules available on request of any party at any time, identify a website address, or include a waiver of the right to a copy of the rules subject to revocation upon request.

Arbitration can result in an efficient, inexpensive and fair dispute resolution process if routine and repetitious issues are removed from the litigation mode, and parties eliminate the direct and collateral effects impeding the dispute resolution process and escalating costs.