California Supreme Court Vacates Arbitration Award and Refuses to Enforce Arbitration Clause in Void Contract

The California Supreme Court held that a law firm’s failure to disclose to the firm’s client the firm’s conflict of interest violated Rules of Professional Conduct and thus rendered the firm’s engagement agreement with its client, including the arbitration clause, unenforceable in its entirety.

This decision is interesting for:

1. applying state arbitration law rather than the Federal Arbitration Act;
2. vacating an arbitration award on the merits; and
3. not applying the separability doctrine of Prima Paint v. Flood & Conklin (1967) 388 U.S. 395.

On the first of these topics, the court said: “the parties’ agreement calls for application of California law, including the CAA, and both parties agree that the CAA governs. This case thus presents no question concerning application of the Federal Arbitration Act, 9 United States Code section 1 et seq. (See Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 470; Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 387.)”

On the second, the court said: a court may vacate an arbitration award when “[t]he arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the

decision upon the controversy submitted.” (Code Civ. Proc., § 1286.2, subd. (a)(4) (section 1286.2(a)(4)).) And: “the merits of an arbitral award are not generally subject to judicial review, but ... “the rules which give finality to the arbitrator’s determination of ordinary questions of fact or of law are inapplicable where the issue of illegality of the entire transaction is raised in a proceeding for the enforcement of the arbitrator’s award.”

Law 360 discusses the case

California Legislature Opens Door to Out of State Lawyers in Arbitration

California Governor Jerry Brown signed into law Senate Bill 766, which allows out of state lawyers to represent parties in commercial arbitrations located in California. The previous restriction on out of state lawyers stemmed from the California Supreme Court decision in Birbrower, Montalbano, Condo & Frank v. Superior Court of Santa Clara County, 17 Cal. 4th 119 (1998). As I pointed out in a past post, the extra burden imposed by that decision may have led some parties to draft arbitration clauses to steer arbitration away from California. 

Dixon Dern, a California attorney, arbitrator, and mediator, offers a more detailed discussion of the bill and its requirements.

Arbitration Clauses in Corporate Charters to Prevent Investor Class Actions?

The Securities and Exchange Commission, as I noted a few months ago, is considering whether to start allowing arbitration clauses in corporate charters, so investor-company disputes would go to individual arbitration rather than class-action litigation.

Opposing this reform is Secure Our Savings (SOS), which recently submitted a letter to SEC Chairman Jay Clayton. SOS wants the Chair "to reaffirm the SEC’s longstanding position that forced

arbitration provisions that prevent investors from bringing or participating in class actions

violate Section 29(A) of the Exchange Act." 

Criticizing SOS is Alan Kaplinsky, leader of the effort to enforce consumer-finance arbitration agreements with class waivers.