California Choice-of-Law Provision Constitutes Waiver of Federal Arbitration Act
In a recent decision, the California Court of Appeal held where a brokerage agreement included a California choice-of-law provision, the parties had waived application of the Federal Arbitration Act (“FAA”); and denied a motion to compel arbitration because the involvement of multiple parties with separate arbitration agreements and differing choice-of-law provisions would open the door to inconsistent rulings in different venues.
In Mastick v. TD Ameritrade, Inc., 209 Cal. App. 4th 1258 (2012), the California Court of Appeal, Second District, partially reversed a trial court’s order denying separate motions to compel arbitration. The court upheld the lower court’s ruling that arbitration sought pursuant to an arbitration agreement with a California choice of law provision could be denied under California Code of Civil Procedure §1281.2(c) (the “1281.2(c)”). That statute gives courts discretion to refuse to enforce an arbitration agreement if a party to the agreement is involved in litigation with a third party arising out of the same transaction and a separate arbitration could result in conflicting rulings on common issues of fact or law. The Court of Appeal, however, reversed a portion of the lower court’s ruling that had applied 1281.2(c) to the arbitration provision of a contract that had a Nebraska choice of law provision.
Plaintiff Mastick sued her accountant and two brokerages alleging negligence in providing advice regarding the tax consequences of certain securities transactions. The brokerages each moved to compel arbitration pursuant to the arbitration clauses contained in the customer agreements Plaintiff signed, one of which required arbitration pursuant to AAA rules, and one in accordance with FINRA rules. The trial court utilized its discretion to deny both petitions on the grounds that granting the motions would result in the case being heard in three forums, which the trial court found created a risk of inconsistent rulings. The trial court based its order on 1281.2(c). Importantly, the trial court rejected the movants’ arguments that the security brokerage agreements and their arbitration provisions were subject to and controlled by the Federal Arbitration Act (“FAA”), finding that the California Arbitration Act, including 1281.2(c), was not preempted specifically because the parties’ agreements provided they were governed by state law.
The Court of Appeal found that the trial court’s conclusions were “reasonable, fair, and consistent with common sense,” but concluded it was nevertheless obligated to partially reverse on state law grounds. Notably, it affirmed the order as to the arbitration agreements expressly governed by California law, while it reversed as to the agreements governed by Nebraska law, finding that the trial court had improperly invoked 1281.2(c) to preclude enforcement of the arbitration agreement where Nebraska law had no comparable provision. The court noted that even if the Nebraska choice of law provision was unenforceable, as the plaintiff contended, the same result would follow because the FAA also did not include a non-enforcement provision comparable to 1281.2(c).
The Mastick decision provides another compelling consideration when drafting choice of law provisions. While other considerations may make California law desirable, its application in this context could undermine the ability of brokerage firms to rely upon the FAA’s preference for enforcement of arbitration agreements.