A previous posting entitled “Supreme Court to Decide if Parties Can Agree to Judicial Review of an Arbitration Award,” discussed the U.S. Supreme Court’s intention to review the issue of whether parties may agree to expanded judicial review of arbitration awards under the Federal Arbitration Act. Because businesses may be parties to contracts and licenses that will be governed by state arbitration statutes instead of the FAA, companies should also keep an eye on how this issue is being addressed in the state courts.
For instance, while the federal appellate courts have split on the issue, with most courts allowing parties to agree to expanded judicial review, the trend in California has the been the opposite. The California appellate decisions addressing the issue have concluded that parties may not agree to expanded judicial review. In Baize v. Eastridge Companies (2006) 142 Cal.App.4th 293 [47 Cal.Rptr.3d 763], the parties included a provision in their arbitration agreement requiring the arbitrator to apply California substantive law. The court held that despite this provision, the award could not be vacated on the ground that the arbitrator did not apply the proper law. In Cable Connection, Inc. v. Directv, Inc. (2006) 143 Cal.App.4th 207 [49 Cal.Rptr.3d 187], the court even more strongly rejected the parties’ attempt to expand judicial review. The parties in DirecTV included a provision specifically stating that any arbitration award was reviewable for failure to apply the law. The court held that the grounds for vacating or modifying an award listed in the California arbitration act were exclusive and a court is therefore prohibited under California law from vacating or modifying an award on any ground not listed in the statutes. The parties’ agreement to add another basis for vacating or modifying an award was therefore entirely unenforceable.
The California Supreme Court has granted review of the DirecTV case to address whether parties to a commercial arbitration agreement may contractually expand the jurisdiction of the trial court to permit review of an arbitration award for legal error. The case has been fully briefed by the parties and has generated some interest, including a request by L.F.P., Inc – Larry Flint Publications – to file an amicus brief. Oral argument has not yet been scheduled. Because so many companies do business in California and because decisions of the California courts often influence decisions in other states, this case should be watched closely.