CABLE CONNECTION, INC. v. DIRECTV, INC.

Filed 9/22/06

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FOUR

Story continue from Part I ...

The Kyocera court continued: “[P]rivate parties have no power to determine the rules by which federal courts proceed, especially when Congress has explicitly prescribed those standards. Pursuant to Volt, parties have complete freedom to contractually modify the arbitration process by designing whatever procedures and systems they think will best meet their needs--including review by one or more appellate arbitration panels. Once a case reaches the federal courts, however, the private arbitration process is complete, and because Congress has specified standards for confirming an arbitration award, federal courts must act pursuant to those standards and no others. Private parties’ freedom to fashion their own arbitration process has no bearing whatsoever on their inability to amend the statutorily prescribed standards governing federal court review.” (Kyocera, supra, at p. 1000, italics added.)

The Seventh and Tenth Circuits have similarly held that private parties cannot contract for a different standard of judicial review. (See Chicago Typographical Union v. Chicago Sun-Times (7th Cir. 1991) 935 F.2d 1501, 1504-1505; Bowen v. Amoco Pipeline Co. (10th Cir. 2001) 254 F.3d 925, 933. See also UHC Management Co. v. Computer Sciences Corp. (8th Cir. 1998) 148 F.3d 992, 998 [strongly suggesting that the FAA precludes parties from agreeing to an alternate standard of review, but resolving the matter on other grounds].)

In contrast, the First, Third, Fourth, and Fifth Circuits have held that the FAA does not preclude parties from agreeing to an expanded standard of judicial review. (See Puerto Rico Telephone v. U.S. Phone Mfg. (1st Cir. 2005) 427 F.3d 21, 31; Roadway Package System, Inc. v. Kayser (3d Cir. 2001) 257 F.3d 287, 293; Syncor Intern. Corp. v. McLeland (4th Cir. Aug. 11, 1997) 120 F.3d 262 (Table) 1997 WL 452245 [unpublished]; Gateway Technologies v. MCI Telecommunications (5th Cir. 1995) 64 F.3d 993.)

Insofar as we need pronounce on the issue, we agree with the reasoning of the Ninth Circuit in Kyocera, supra, 341 F.3d 987. Nothing in the FAA purports to give private parties the power to expand by contract the statutorily conferred jurisdiction of courts to vacate arbitration awards. Just as the FAA does not compel federal courts to enforce attempts to contractually expand their limited power to review arbitral decisions, it also does not compel California courts to enforce attempts to contractually expand their power to review arbitral decisions conferred by the California Arbitration Act. Thus, we decide that we are not required by the FAA to enforce the arbitration agreement according to its terms, including the provision that allows for judicial review of legal error.

Accordingly, we conclude that the arbitration award before us was subject to the limited judicial review described by the Supreme Court in Moncharsh. As such, the merits of the controversy between the parties were not properly subject to judicial review. The trial court candidly stated that “[i]n determining whether to vacate the award,” it was required to analyze “whether the arbitrators properly applied California law,” and “whether the arbitrators made errors of law.” However, the trial court was not authorized to review the validity of the arbitrators’ reasoning for errors of fact or law, or to determine whether the evidence was sufficient to support the arbitrators’ award. (Moncharsh, supra, 3 Cal.4th at p. 11.) In deciding that the arbitrators misapplied California’s substantive law regarding contract interpretation by inserting a new term into the sales agency agreement to permit classwide arbitration, the trial court categorically exceeded the reach of its authority. There is no dispute that deciding whether classwide arbitration was to be permitted was a matter within the scope of the controversy submitted to the arbitrators, and that the arbitrator’s resolution of this issue is what the parties bargained for in the arbitration agreement. The trial court could not properly find that the arbitrators exceeded their powers within the meaning of section 1286.2, subdivision (a)(4), by deciding the issue incorrectly. (Moncharsh, supra, 3 Cal.4th at p. 28; Moshonov v. Walsh, supra, 22 Cal.4th at pp. 775-776; Moore v. First Bank of San Luis Obispo, supra, 22 Cal.4th at p. 787; Alexander v. Blue Cross of California, supra, 88 Cal.App.4th at p. 1089.)

Disregard of an Express Provision in the Arbitration Agreement

DIRECTV contends that the trial court’s order vacating the award nonetheless finds support in case law establishing that arbitrators exceed their powers within the meaning of section 1286.2 by disregarding express provisions of the arbitration agreement. For example, in O’Flaherty v. Belgum (2004) 115 Cal.App.4th 1044, a dispute involving dissolution of a law partnership, the Court of Appeal reversed the trial court’s judgment confirming an arbitration award, with directions to vacate the award, on the basis that the arbitrator had exceeded his powers by awarding a remedy that was forbidden by the parties’ partnership agreement. The award directed the withdrawing partners to forfeit their capital accounts, despite the fact that the partnership agreement at issue expressly provided for a return of capital, even to a wrongfully withdrawing partner. In addition, the partnership agreement was governed by the Uniform Partnership Act (Corp. Code, § 16111), in which no provision is made for forfeiture of capital accounts.[1] (Id. at pp. 1057-1058.)

Similarly, in California Faculty Assn. v. Superior Court (1998) 63 Cal.App.4th 935, in reviewing a university president’s decision not to grant tenure to a professor, the arbitrator’s authority was limited by the parties’ agreement to determining whether the president’s decision was based on reasoned judgment or constituted an abuse of discretion. The arbitrator was not to undertake an independent evaluation of the professor’s performance and scholarly achievements, but clearly did so in overturning the president’s decision. (Id. at pp. 945-946, 950-952.) The court found that the arbitrator exceeded the scope of his authority as expressly defined by the parties’ agreement, and therefore affirmed the trial court’s grant of the university’s motion to vacate the award. (Id. at pp. 952-953.)

Finally, in Bonshire v. Thompson (1997) 52 Cal.App.4th 803, the underlying contract contained an arbitration clause and an integration clause that expressly barred the arbitrator from considering extrinsic evidence in interpreting the contract. (Bonshire v. Thompson, supra, 52 Cal.App.4th at pp. 806-808.) One of the parties to the contract sought to reform it, and the arbitrator examined extrinsic evidence in framing the arbitration award. (Id. at pp. 806-808.) The court concluded that the arbitrator had exceeded his powers, given the express prohibition on extrinsic evidence. (Id. at pp. 811-812.)

By contrast here, the arbitrators did not violate any similarly express provision in the sales agency agreement. DIRECTV contends that certain language in the agreement indicates that the parties contemplated only separate and individual arbitrations rather than classwide arbitration. That is vastly different from saying that the agreement expressly prohibits classwide arbitration. There simply is no provision in the parties’ agreement that prohibits classwide arbitration. The cases cited above upon which DIRECTV relies are entirely distinguishable.

Erroneous Application of California Procedural Law

DIRECTV further contends that the arbitrators exceeded their powers by relying on Keating v. Superior Court, supra, 31 Cal.3d 584 (approving of classwide arbitration) and Blue Cross, supra, 67 Cal.App.4th 42 (permitting arbitrators to order classwide arbitration in a case governed by Federal Arbitration Act where the parties’ agreement is silent) because those cases establish only procedural law, and the arbitration agreement at issue directs the arbitrators to apply federal procedural law and California substantive law. We disagree with DIRECTV’s characterization of Keating and Blue Cross as establishing only procedural law when they held classwide arbitration to be permissible.

“Substance and procedure are not static legal concepts. ‘[A] statute or other rule of law will be characterized as substantive or procedural according to the nature of the problem for which a characterization must be made.’ (Grant v. McAuliffe (1953) 41 Cal.2d 859, 865.) ‘”As a general rule, laws which fix duties, establish rights and responsibilities among and for persons . . . are ‘substantive laws’ in character, while those which merely prescribe the manner in which such rights and responsibilities may be exercised and enforced in court are ‘procedural laws.’”’ (Vienna v. California Horse Racing Bd. (1982) 133 Cal.App.3d 387, 394, citing Black’s Law Dict. (5th ed.) p. 1083, col. 2.)” (Berman v. RCA Auto Corp. (1986) 177 Cal.App.3d 321, 324.)

Taken together, Keating and Blue Cross established that, under appropriate circumstances, parties to adhesion contracts enjoy the right to pursue redress of grievances by way of classwide arbitration. Their conclusions were based in large part on the fact that arbitration is highly favored, as well as the perception that gross unfairness would result in some cases from the denial of the opportunity to proceed on a classwide basis. (See Blue Cross, supra, at pp. 53-55.) In this context, the right to pursue classwide arbitration cannot be said to constitute a mere procedural vehicle. Rather, it is more accurately described as constituting a substantive right.

In Discover Bank v. Superior Court, supra, 36 Cal.4th 148, the Supreme Court discussed the procedural and substantive elements of the doctrine of unconscionability, in the context of considering the enforceability of class action waivers in contracts of adhesion. The court’s comments in that regard are instructive for our purposes here. It said: “Some courts have viewed class actions or arbitrations as a merely procedural right, the waiver of which is not unconscionable. (See, e.g., Strand v. U.S. Bank National Association ND (N.D. 2005) 693 N.W.2d 918, 926 (Strand ); Blaz v. Belfer (5th Cir. 2004) 368 F.3d 501, 504-505; Johnson v. West Suburban Bank (3d Cir. 2000) 225 F.3d 366, 369; Champ v. Siegel Trading Co., Inc. (7th Cir. 1995) 55 F.3d 269, 277; but see Leonard v. Terminix Intern. Co. L.P. (Ala. 2002) 854 So.2d 529, 538 [class action waiver together with limitation of damages clause in adhesive consumer arbitration agreement deprives plaintiffs of a “meaningful remedy” and is therefore unconscionable]; State v. Berger (W.Va. 2002) 211 W.Va. 549 [567 S.E.2d 265, 278] [holding contract provision limiting class action rights unconscionable]; Powertel v. Bexley (Fla.Dist.Ct.App. 1999) 743 So.2d 570, 576 [same].) But as the above cited cases of this court have continually affirmed,[[2]] class actions and arbitrations are, particularly in the consumer context, often inextricably linked to the vindication of substantive rights. Affixing the ‘procedural’ label on such devices understates their importance and is not helpful in resolving the unconscionability issue.” (Discover Bank v. Superior Court, supra, 36 Cal.4th at p. 161, italics added.)

We conclude that the trial court erred in ruling that the arbitrators exceeded their powers by relying on principles established in Keating and Blue Cross, as the holdings of these cases do indeed constitute substantive law, which the arbitrators were directed to follow. As such, even if the arbitration award were properly reviewable by the trial court and by this court for legal error, the trial court’s ruling that the majority arbitrators erred in their application of California substantive law would require reversal. The law established in Blue Cross and Keating gives arbitrators discretion to order classwide arbitration even where the arbitration agreement is silent on that issue, in divergence from the general rules of contract interpretation that terms are not to be inserted into contracts.

Refusal to Admit Extrinsic Evidence

DIRECTV submitted to the arbitrators the declarations of several DIRECTV-compatible equipment retailers and of the person who drafted the sales agency agreement on behalf of DIRECTV, in an effort to support its argument that the parties did not intend to permit classwide arbitration when they entered into the arbitration agreement in the sales agency agreement. DIRECTV contends that the trial court properly vacated the arbitration award on the basis that the arbitrators failed to “consider relevant extrinsic evidence,” i.e., the retailers’ and drafter’s declarations. Pursuant to section 1286.2, subdivision (a)(5), a trial court shall vacate an arbitration award if the court determines that “The rights of the party were substantially prejudiced . . . by the refusal of the arbitrators to hear evidence material to the controversy.” The trial court based its vacation of the award, in part, on this ground. We conclude that the trial court erred in so doing.

The record on appeal contains the following comments by one of the arbitrators: “The next issue to address was the request that the Panel was going to consider the declarations attached to respondent’s brief that the declarants be required to let the panel--that declarants be physically present today. We’ve all read the brief and we have read the declarations, but our view is that it’s essentially a question of law and construction interpretation of the contract itself. And so the declarations are not of significance. . . . But it is denied.”

Thus, the request that was denied was that the panel allow the declarants to be physically present.[3] The denial was not with regard to admitting the declarations. In addition, the statement by the arbitrator that “we have read the declarations,” effectively ends our inquiry because it definitively demonstrates that the arbitrators did not “refus[e] . . . to hear evidence material to the controversy.” (§ 1286.2, subd. (a)(5).)

The court in Gonzales v. Interinsurance Exchange (1978) 84 Cal.App.3d 58 concluded that alleging a failure to consider evidence is not tantamount to alleging a refusal to hear evidence, and failure to allege a refusal to hear evidence renders fatally defective a petition to vacate brought pursuant to section 1286.2, subdivision (a)(5). “Webster defines the words consider and hear to leave no other conclusion. Hear is ‘To perceive by the auditory sense; to take cognizance of by ear; to give audience or allowance to speak; to listen to . . . .’ Consider is ‘to view attentively . . . to fix the mind on, with a view to careful examination; to think on with care; to ponder; to study; to meditate on; . . .’ It is obvious from these definitions that the two words are not synonymous. One cannot ‘consider’ what one has refused to ‘hear.’ Legally speaking the admission of evidence is to hear it, and the weighing of it is to give it consideration. The failure to allege a refusal to hear evidence renders this petition fatally defective in this respect, since failure to consider evidence is not a ground to vacate the award.” (Id. at p. 63; see also 6 Cal. Jur. 3d Arbitration and Award, § 144, database updated May 2006.)

The record on appeal makes clear that the arbitrators did not “refus[e] . . . to hear evidence material to the controversy.” (§ 1286.2, subd. (a)(5), italics added.) Vacation of the award on this basis was not warranted.

In any event, the declarations at issue were not relevant. They merely offered the subjective opinions of a few dealers and the drafter of the arbitration agreement for DIRECTV regarding their undisclosed understanding and intention that the arbitration provision would not permit classwide arbitration, without relating any objective facts surrounding the negotiations over the provision that would demonstrate that the matter was considered or discussed.

“Although the intent of the parties determines the meaning of the contract (Civ. Code, §§ 1636, 1638), the relevant intent is ‘objective’--that is, the objective intent as evidenced by the words of the instrument, not a party’s subjective intent. (Beck v. American Health Group Internat., Inc. (1989) 211 Cal.App.3d 1555, 1562.) . . . The true intent of a contracting party is irrelevant if it remains unexpressed. (211 Cal.App.3d 1555, 1562; see also City of Mill Valley v. Transamerica Ins. Co. (1979) 98 Cal.App.3d 595, 603.)” (Shaw v. Regents of University of California (1997) 58 Cal.App.4th 44, 54-55. See also Titan Group, Inc. v. Sonoma Valley County Sanitation Dist. (1985) 164 Cal.App.3d 1122, 1127: [“It is the objective intent, as evidenced by the words of the contract, rather than the subjective intent of one of the parties, that controls interpretation. ‘[I]t is now a settled principle of the law of contract that the undisclosed intentions of the parties are . . . immaterial; and that the outward manifestation or expression of assent is controlling.’ (Brant v. California Dairies, Inc. (1935) 4 Cal.2d 128, 133.)”] Cf. Hess v. Ford Motor Co. (2002) 27 Cal.4th 516, 528 [“Because the testimony of the contracting parties described their disclosed intentions, it was undoubtedly relevant. As such, we do not address the issue whether undisclosed intentions are admissible ‘to assist the trier of fact in understanding the surrounding circumstances and negotiations . . . .’ (Neverkovec [v. Fredericks (1999)] 74 Cal.App.4th [337] at p. 351, fn. 9.)”].) As such, we further conclude that the arbitrators did not “refus[e] . . . to hear evidence material to the controversy.” (§ 1286.2, subd. (a)(5), italics added.)

Severability

The parties did not initially address in their briefs on appeal what the effect should be were we to conclude, as we have, that the trial court exceeded its authority by examining the legal merits of the arbitrators’ award. We therefore requested supplemental briefing from the parties to address the following issue: If this court determines to be invalid and unenforceable the provision in the parties’ arbitration agreement that “the award may be vacated or corrected on appeal to a court of competent jurisdiction for any [errors of law or legal reasoning],” can that provision be severed from the arbitration agreement?

The alternatives would be to sever the invalid provision, to find the entire arbitration agreement to be void, or to remand the matter for the purpose of holding an evidentiary hearing on the issue. Having considered the applicable law and the supplemental briefing, in which DIRECTV argues against severability and the dealers argue in favor thereof, we conclude that the invalid provision can and should be severed from the arbitration agreement.

In Crowell, supra, 95 Cal.App.4th at page 740, the appellate court concluded that “[t]he provision for judicial review of the merits of the arbitration award was so central to the arbitration agreement that it could not be severed. To do so would be to create an entirely new agreement to which neither party agreed.” Accordingly, the Crowell court concluded that the plaintiff could not amend his complaint for declaratory relief to sever the unenforceable provisions of the arbitration agreement, with the effect that the entire arbitration agreement was determined to be null and void.

The court in CC Partners, supra, 101 Cal.App.4th 635, also found invalid a provision in an arbitration agreement that attempted to permit judicial review of legal errors, but diverged from the Crowell court with regard to the severability of the invalid provision. The court’s analysis is instructive, and we therefore quote from it at some length: “We agree with the primary holding in Crowell. We do not have the power to review de novo any questions of law decided by the arbitrator. That does not mean, however, that we necessarily follow Crowell and find the parties’ arbitration agreement void and unenforceable.

“The Crowell court was not reviewing a judgment confirming an arbitration award. It was reviewing the sustaining of a demurrer to a complaint, filed prior to arbitration, seeking declaratory relief. Here, the arbitration has been completed and the Authority is seeking to confirm the arbitration award. An improper attempt to expand the scope of judicial review is not among the statutory grounds for vacating an arbitration award. (See Code Civ. Proc., § 1286.2.)

“The Crowell court also did not have to consider a severance clause.[[4]] Here, in contrast, the License Agreement contains a broad severance clause: ‘If any provision of this License Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this License Agreement and the application of such provision to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law.’

“The unmistakable intent of this language is that all provisions of the License Agreement, including the arbitration agreement, are to be enforced except to the extent they are invalid. CC Partners, however, suggests that we remand this matter to the trial court for an evidentiary hearing on severability. We decline to do so.

“First, we see no ambiguity in the language of the severance clause. It plainly provides that the remainder of the parties’ agreement will not be affected by any invalid provisions. Though California law permits the use of extrinsic evidence to explain the meaning of a written instrument (Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 37), CC Partners fails to point to any ambiguity in the severance clause and it does not suggest how the language could have a different meaning. It has made no offer of proof as to what evidence it would introduce to reveal an ambiguity or suggest a different meaning.

“Second, the principles of equity underlie the enforcement of arbitration agreements. (Saika v. Gold [(1996)] 49 Cal.App.4th [1074] at p. 1081.) Equity also informs the decision as to whether to sever an illegal term of a contract. In Armendariz v. Foundation Health Psychcare Services, Inc. [(2000)] 24 Cal.4th [83] at page 123, the California Supreme Court set forth two reasons for severing illegal terms rather than voiding an entire contract: ‘The first is to prevent parties from gaining undeserved benefit or suffering undeserved detriment as a result of voiding the entire agreement--particularly when there has been full or partial performance of the contract. [Citations.] Second, more generally, the doctrine of severance attempts to conserve a contractual relationship if to do so would not be condoning an illegal scheme. [Citations.] The overarching inquiry is whether “‘the interests of justice . . . would be furthered’” by severance.’ (Id. at pp. 123-124; see Beynon v. Garden Grove Medical Group (1980) 100 Cal.App.3d 698, 713-714 [provision in arbitration agreement void as against public policy severed from agreement and arbitration award confirmed]; Saika v. Gold, supra, 49 Cal.App.4th at pp. 1081-1082 [provision in arbitration agreement contravenes public policy and will not be enforced; case remanded with directions to confirm arbitration award].)” (CC Partners, supra, 101 Cal.App.4th at pp. 645-647.)

The court in CC Partners concluded that it would sever the unenforceable provision, and confirm the arbitration award. Failing to do so would result in CC Partners’ gaining an undeserved benefit, would ignore the parties’ intent that the remainder of their agreement remain unaffected by the invalidity of any particular provision, and would ill serve the interest of justice and the policy of this state to encourage arbitration of disputes. (Id. at p. 647.)

Similarly, in Kyocera, supra, 341 F.3d 987, the Court of Appeals, applying California state law, considered whether the invalidity of the provision regarding an expanded standard of review rendered the entire arbitration clause unenforceable, and concluded that it did not. (Id. at pp. 1000-1002.) One of the parties asserted that the potential for expansive appellate review was critical to the entire agreement, making the unenforceable and the enforceable contractual provisions integrated and interdependent, such that the offending provision could not be severed. (Id. at pp. 1001-1002.) However, the party arguing against severability cited no evidence in support of that assertion. (Id. at p. 1002.) Relying on Little v. Auto Stiegler, Inc., supra, 29 Cal.4th 1064, in which the California Supreme Court severed a term providing for arbitral review of an arbitration award, the court in Kyocera concluded that “surely the external scope of judicial review is not sufficiently central to the arbitration clause to defeat severability.” (Ibid.)

The arbitration agreement at issue here contains a severance clause, section 18.9, regarding “invalid or unenforceable provisions.” It states in relevant part: “If any provision of this Agreement is determined to be invalid or unenforceable, the provision shall be deemed severed from the remainder, which shall remain enforceable.”

This language is unambiguous. The parties plainly expressed the intention that the remainder of their agreement would not be affected by any invalid provisions. DIRECTV has not cited to any evidence in support of the assertion that appellate review was critical to the entire agreement, merely asserting that “no rational corporate defendant would agree” to such an arbitration process.[5] In addition, we find that the interests of justice would not be served by invalidating the entire arbitration agreement. Doing so would ignore the parties’ intent that the remainder of their agreement remain unaffected by the invalidity of any particular provision, and would ill serve the interests of justice and the policy of this state, and of the FAA, to encourage arbitration of disputes. (See Titan Group, Inc. v. Sonoma Valley Sanitation Dist., supra, 164 Cal.App.3d at p. 1127 [we are guided by the rule that, contractual arbitration being a favored method of resolving disputes, every intendment will be indulged to give effect to such proceedings].)

Accordingly, we sever the provision from the arbitration agreement that “the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error.” The remainder of the agreement shall remain extant.

disposition

The order vacating the arbitration award is reversed, and the trial court is directed to enter a new order confirming the award. Appellants are to recover their costs on appeal.

CERTIFIED FOR PUBLICATION

WILLHITE, Acting P. J.

We concur:

MANELLA, J.

SUZUKAWA, J.

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[1] The appellate court also reversed the judgment based on the conclusion that the arbitrator exceeded his powers by adjudicating claims involving the partnership rather than the individual partners, where a receiver had been appointed for the partnership, and thus, only the receivership court had jurisdiction to determine all issues relating to the receivership. (Id. at pp. 1061-1063.)

[2] See Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064; Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807; and Linder v. Thrifty Oil Co. (2000) 23 Cal.4th 429.

[3] This characterization of the request is confirmed by counsel’s response to the arbitrator’s statement, which was to seek clarification of the panel’s authority to compel attendance of witnesses.

[4] In a footnote inserted at this point, the CC Partners court noted: “At the request of the Authority, we have taken judicial notice of the pleadings in Crowell, which incorporated the parties’ agreement. That agreement contains no severance provision.” (CC Partners, supra, 101 Cal.App.4th at p. 646, fn. 4.)

[5] DIRECTV contends that severance of only the expanded judicial review provision would not be legally viable, as that provision “is only a portion of a larger idea and purpose of the arbitration agreement, which is to limit the powers of the arbitrators to make errors of law or legal reasoning and to preserve a mechanism to enforce this limit.” It continues: “The parties would, on the surface, retain their agreed-upon arbitration free from legal errors, but would lose any means to enforce the limitation they placed on the arbitrators.” We conclude, however, that the remaining language is not rendered meaningless in the absence of a mechanism for its enforcement. The provision requiring the arbitrators to follow the law differentiates the arbitrators’ instructions from those arbitration agreements in which the parties contemplate that the arbitrators will do justice but not be bound by the strict confines of the law.