Court of Appeal Rules on Arbitration, Choice of Law Issues

In Countrywide Financial Corp. v. Bundy (August 6, 2010) --- Cal.App.4th ---, 2010 WL 3064481, Countrywide account executives and call center employees filed consolidated class arbitrations alleging various wage and hour violations, including failure to pay bonus compensation, waiting time penalties, and violation of the UCL. The arbitrator issued a number of interim awards, including orders (1) dismissing claims for what the Court described as penalties under Labor Code section 204 and (2) granting class certification.

Countrywide filed a petition in Superior Court to modify or vacate the interim awards. The Superior Court granted the petition, the employees appealed, and the Court of Appeal reversed.

The Court first determined whether to apply Federal or California law, which incorporate different standards for vacating arbitration awards. After reviewing the applicable arbitration clauses, the Court held:

Here, the parties unambiguously agreed that any award would be reviewed as it would be by a federal district judge applying the Federal Arbitration Act. Accordingly, we review the partial awards in this case utilizing the vacatur provisions of Federal Arbitration Act which would be applied by a United States District Court judge.

Slip op. at 8. The Court noted that the arbitration agreements at issue were "executed prior to the holding in Hall Street Associates L.L.C. v. Mattel, Inc. (2008) 552 U.S. 576, 579-580, 128 S.Ct. 1396, 170 L.Ed.2d 254, that no enhanced merits based judicial review may be conducted in a United States District Court under the Federal Arbitration Act pursuant to the litigants' stipulation." Slip op. at 9. The Court thus considered the law as it existed prior to Hall Street Associates.

The Court next explained the limited review of arbitration orders available in District Court:

In federal court, there is one certain relevant statutory provision and a possible second way in which the merits of an arbitration award can be attacked. The relevant certain method for challenging the merits of an arbitration award, albeit extremely limited, is in title 9 United States Code section 10(a)(4) which provides in part: “In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration-[¶] (4) where the arbitrators exceeded their powers....” The United States Supreme Court has described this narrow scope of judicial review: “It is not enough for petitioners to show that the panel committed an error-or even a serious error. [Citations.] ‘It is only when [an] arbitrator strays from interpretation and application of the agreement and effectively “dispense[s] his own brand of industrial justice” that his decision may be unenforceable.’ [Citations.]” Even gross, ‘ “painfully clear” ‘ or “obvious” errors are insufficient to permit vacatur under title 9 United States Code section 10(a) (4) which is the relevant statutory vacatur provision.

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It is less clear in federal court that an arbitration award can be attacked because the arbitrator has acted in manifest disregard of the law. At one point, there was Supreme Court authority for the proposition that in federal court an award may be vacated if it is made in manifest disregard of the law.... [However], in Hall Street Associates L.L.C., the Supreme Court cast doubt on whether the manifest disregard of the law rule remains viable.

Slip op. at 11-12. Despite this uncertainty (or perhaps because of it), the Court decided to analyze the arbitration awards under both the excess of powers test and the manifest disregard of the law test. Slip op. at 13.

Regarding the manifest disregard of the law test, the Court stated:

The most prevalent manifest disregard of the law test contains two elements. The first element is the arbitrator must know the governing rule of law and refuse to apply it or ignore it. The second element is that the law ignored by the arbitrator is well-defined, explicit, and clearly applicable to the case.

Slip op at 13.

Having gone through all of this analysis, the Court then held that Countrywide would have no grounds for vacating the arbitration awards in District Court.

First, the Court held that Countrywide could not vacate the arbitrator's award allowing the employees to proceed with a UCL claim.

Thus, Business and Professions Code section 17200 provides an independent basis for potential liability apart from Labor Code section 204. And the arbitrator expressly dismissed all of defendants' penalty claims. There is no independent Labor Code section 204 claim pending in this case. Rather, defendants are asserting claims for restitution which are expressly provided for by the Unfair Competition Law. Finally, the sole issue raised by plaintiffs is that the Labor Code section 204 claims cannot be pursued. There are a myriad of defenses which remain to be litigated. Thus, a federal district court judge could not lawfully set aside the arbitrator's ruling on defendants' Business and Professions Code section 17200 unfair competition claims.

Slip op. at 16.

Second, the Court held that Countrywide could not vacate the award on grounds that the arbitrations were barred by res judicata because the current litigation was not identical to the prior litigation on which Countrywide relied. Slip op. at 16-20.

Third, the Court rejected Countrywide's effort to vacate the award on grounds that not all class members signed the same arbitration agreement and not all class members agreed to arbitration before the AAA.

[Employees] presented evidence to the arbitrator that all employees were required to agree to arbitration. Before the arbitrator, [Countrywide] presented no evidence of a single class member who did not sign an agreement vesting potential arbitral jurisdiction in the American Arbitration Association.

Slip op. at 20.

Finally, the Court rejected Countrywide's apparently late argument that it had not consented to classwide arbitration.

Finally, there is no merit to plaintiffs' arguments that the present record supports the conclusion they did not agree to classwide arbitration. They never claimed in the trial court they had not consented to classwide arbitration. They never argued to the arbitrator they objected to classwide arbitration. And the present record indicates plaintiffs in fact agreed to classwide arbitration at the commencement of the proceedings. The present record thus indicates they consented to classwide arbitration and, in any event, the issue has been forfeited because it was not presented to the arbitrator and Judge White. ( Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp. supra, 559 U.S. at p. ---- [130 S.Ct. at pp. 1774-1775] [consent]; T.Co Metals v. Dempsey Pipe & Supply (2d Cir.2010) 592 F.3d 329, 346, fn. 10 [forfeiture].)

Slip op. at 21.