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When ruling on a motion to compel arbitration, courts must first look to the arbitration agreement to determine whether the Federal Arbitration Act (FAA) or California state arbitration law applies, the California Court of Appeal has determined. If the parties expressly state that the FAA applies, then California law is preempted.
This California case holds that California state arbitration law must yield to federal arbitration law and that California state courts must apply federal law and not California law in reviewing and enforcing an arbitration case governed by the Federal Arbitration Act. This holding is consistent with the most recent state court case in Arkansas. See Pest Management, Inc. v. Langer, No. CA05-1387, 2006 WL 2741921 (Ark. Ct. App. Sep. 27, 2006).
In Rodriguez v. American Technologies, Inc., 39 Cal. Rptr. 3d 437 (Cal. Ct. App. 2006), Rodriguez sued a contractor and several insurance companies in connection with repair work done on his home after he filed an insurance claim.
Rodriguez and the contractor were bound by an arbitration agreement, but the insurance companies were not. The agreement stated that “pursuant to the Federal Arbitration Act,” the parties would arbitrate all claims arising from their contract.
The contractor moved to compel arbitration and to stay the proceedings initiated by Rodriguez. Under the FAA, the contractor argued, the court was required to compel arbitration regardless of whether the lawsuit involved other parties.
Rodriguez argued that the FAA did not apply to the agreement, and that California law gave the judge discretion to refuse to compel arbitration. The United States Supreme Court had previously held that the FAA did not preempt California arbitration law when the parties had agreed California law would apply. See Volt Info. Sciences v. Bd. of Trustees, 489 U.S. 468 (1989). Because several sections of the contract referred to California law, the trial court applied California law and denied the contractor’s motion.
On appeal, the Court stated that parties to an agreement can explicitly choose to have their agreement governed by the FAA rather than California arbitration law. The Court held that by stating in the agreement that all disputes would be decided “pursuant to the Federal Arbitration Act,” the parties in this case did exactly that.
In deciding that the agreement contemplated the application of the FAA to the exclusion of California arbitration law, the Court applied the plain meaning of the term “pursuant,” i.e., “in conformance to or agreement with.” The Court also noted that, unlike contracts in other cases, the contact contained no language limiting the FAA’s application. It also did not mention applying California arbitration law to the dispute.
Under these circumstances, the Court found no ambiguity in the agreement and determined that the FAA should govern all aspects of the arbitration. The FAA does not allow judges to refuse to compel arbitration in the face of a valid arbitration agreement, the Court held, so the arbitration should have gone forward.
This case illustrates that parties have the ability to select federal arbitration law to govern their legal disputes. By explicitly exercising this authority, parties have an opportunity to avoid a patchwork of state laws or a state arbitration statute they do not prefer.
It is not uncommon for both the FAA and state law to be referenced in a contractual agreement with an arbitration clause. Parties can choose the FAA to govern the arbitration and can also select a specific state law to govern substantive law decisions. As long as the drafting language is clear, parties can select the law they prefer to apply.
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