By Ellen Bush Sessions, Eric A. Herzog and Spencer Persson
In a recent decision with implications for broker-dealers and other companies that do business in California, the California Court of Appeal considered whether the Federal Arbitration Act (FAA) (9 U.S.C. sections 1-16) preempted application of the California Arbitration Act (CAA) (Cal. Code Civ. Proc., section 1280 et seq.) in the context of two different arbitration agreements. In Mastick v. TD Ameritrade, Inc. [enhanced version available to lexis.com subscribers], the Second Appellate District held in a published opinion that the FAA conflicted with the CAA in one context but not another. Why? As the court explained, "it all depends."
Mastick involved allegations of professional negligence against Oakwood Capital Management, LLC and several of its officers, TD Ameritrade, Inc., and plaintiff's accountant. Oakwood and TD Ameritrade filed petitions to compel arbitration in California Superior Court. Oakwood sought to compel arbitration before the American Arbitration Association (AAA), while TD Ameritrade sought to compel arbitration before the Financial Industry Regulatory Authority (FINRA).
The investment management agreements between plaintiff and Oakwood provided that the parties would be governed by California law and disputes between them would be resolved through arbitration in accordance with the AAA rules. The client agreements between plaintiff and TD Ameritrade were governed by Nebraska law and disputes between them would be resolved through arbitration under FINRA rules.
The trial court denied both petitions to compel because of the risk of inconsistent rulings, finding that the CAA was not preempted by the FAA because "the parties have agreed that their arbitration agreement[s] will be governed by state law." The court found that if it were to enforce the various arbitration agreements, it would require plaintiff to litigate her claims in three different forums, which the court found not to be in the interest of justice. Under Code of Civil Procedure section 1281.2(c), a trial court may "refuse to enforce" an arbitration provision if a contracting party is involved in related litigation with a third party that creates the risk of conflicting rulings on a common issue of law or fact.
The Court of Appeal reversed the decision in part. In first considering the Oakwood agreements, the court ruled that section 1281.2(c) could properly be invoked by the trial court, and that the lower court did not abuse its discretion when it found that enforcement of plaintiff's arbitration agreement with Oakwood would create a risk of conflicting rulings, as plaintiff had also named her accountant as a defendant, who was not a party to any arbitration agreement.
Unlike the Oakwood agreements, the TD Ameritrade agreements did not contain a California choice-of-law provision, but instead were governed by Nebraska law. Like the FAA (and unlike the CAA), the corollary Nebraska statute does not authorize a court to stay arbitration or refuse to enforce an arbitration provision to avoid duplicative proceedings or conflicting rulings. Therefore, the Court of Appeal reversed that portion of the trial court decision and ruled that the trial court must stay the action between plaintiff and TD Ameritrade and order them to arbitrate. The court held that the absence of California choice-of-law provisions in the TD Ameritrade agreements precluded application of section 1281.2(c).
This decision impacts companies, including broker-dealers, who have agreements with their customers that contain arbitration clauses and California choice-of-law provisions. Mastick clarifies the law concerning FAA preemption and provides guidance to companies seeking to avoid application of the CAA's provision that allows courts to "refuse to enforce" an arbitration clause if a contracting party is involved in related litigation with a third party that creates the risk of conflicting rulings on a common issue of law or fact.
The case is Mastick v. TD Ameritrade, Inc., Cal. Ct. App., Nos. B237475, B238070, October 9, 2012.
This article was prepared by Ellen Sessions (firstname.lastname@example.org or 214 855 7465), Eric Herzog (email@example.com or 213 892 9276) and Spenser Persson (firstname.lastname@example.org or 213 892 9223) from Fulbright's Litigation Practice.
Based on a litigation legacy spanning more than nine decades, dispute resolution lawyers at Fulbright & Jaworski handle a broad, diverse body of work spanning many types of cases, industries, clients and jurisdictions. By developing a strategy targeting the right solution for each client, our lawyers produce favorable results for clients at all stages - from lower courts through the entire appeals process.
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Ellen Sessions Eric Herzog Spencer Persson
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