Compelling Arbitration Of the Claims Against Appellants Could Result In Conflicting Rulings On Issues Common To All Defendants
Plaintiff Vox sued six defendants, including four former employees, alleging they conspired to “encumber” Vox’s business to the benefit of their planned competing business. The four former employees were parties to arbitration agreements with Vox, and petitioned to compel arbitration. However, two other defendants were not bound by arbitration agreements. The trial court denied the employees’ request to arbitrate, and employees appealed. Vox Entertainment, Inc. v. Carter Reese, et al., Case No. B244812 (2nd Dist. Div. 2 Feb. 5, 2014) (Chavez, Ashmann-Gerst, Ferns) (unpublished).
Under Cal. Code of Civ. Proc. section 1281.2(c), a court may deny a motion to compel arbitration “when (1) ‘[a] party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party,’ (2) the action or proceeding ‘aris[es] out of the same transaction or series of related transactions,’ and (3) ‘there is a possibility of conflicting rulings on a common issue of law or fact.’”
Appellants/employees, who were seeking arbitration with Vox, challenged only the existence of the third prong – possibility of conflicting rulings. Appellants focused on the trial court’s findings that Vox’s claims against two of the six defendants arose independent of the employment agreements containing the arbitration provisions, and were “not intertwined with the contract claims.” However, the Court of Appeal explained that the trial court’s findings were simply made to establish the first of the three 1281.2(c) requirements – that third parties were involved. Because there was evidence “that compelling arbitration of the claims against [four] appellants could result in conflicting rulings on factual and legal issues common to all [six] of the defendants,” the trial court’s order denying the petition to arbitrate was affirmed.
COMMENT AND PRACTICE TIP: I note that there is no discussion in the opinion of whether California law or the Federal Arbitration Act was referenced in the contracts as governing their interpretation and enforcement. The result could be different here, depending on which law governs. Unlike California arbitration statutes, the FAA does not contain an “inconsistency” provision providing express discretion to deny a motion to compel arbitration. If the contract is governed by the FAA, then the arbitration provision is more likely to be enforced among those parties that have signed the arbitration agreement, notwithstanding the risk of inconsistent results in litigation with third parties who are not bound by arbitration. See my October 10, 2012 post on Mastick v. TD Ameritrade, Inc. and Mastick v. Oakwood Capital Management, Inc., LLC, 209 Cal.App.4th 1258 (2012) in which Justice Gilbert answers the question – when does federal preemption apply? – with a resounding “it all depends.”
If you are concerned when drafting an arbitration clause that future disputes with third parties could lead to inconsistent results, and economic inefficiency, unless everything can be resolved in a judicial forum, then consider making California law govern the clause. However, if you really, really want to arbitrate, notwithstanding the risk of inconsistent results if there is litigation with a party not bound by the arbitration provision, then consider making the FAA govern the arbitration clause.