Vivid Video, Inc. v. Playboy Entertainment Group, Inc. ( 2007 )

MOSK, J., Dissenting.

I respectfully dissent.

In article 8 of their agreement (Article 8), the parties agreed to arbitrate “any controversy, dispute or claim under, arising out of, in connection with or in relation to this agreement,” including disputes relating to the “interpretation, construction, coverage, [or] scope” of that agreement. The parties incorporated into their agreement to arbitrate the Commercial Arbitration Rules of the American Arbitration Association (AAA), which provide in rule 7(a) that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” The parties also specified that the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) would govern their arbitration agreement. Because these proceedings are in a California state court, generally California procedural law, including state law governing appealability, applies. (Muao v. Grosvenor Properties, Ltd. (2002) 99 Cal.App.4th 1085, 1090-1093 [122 Cal.Rptr.2d 131].)

Plaintiff filed an action against defendants in the Los Angeles Superior Court. Defendants then commenced an arbitration and moved in the trial court to compel arbitration of the limited issue of the arbitrability of the dispute and to stay the action pending resolution of the arbitrability issue. (Code Civ. Proc., § 1281.4.)¹ Plaintiff contended that a provision in section 4.6.5 of the agreement, which excepts certain issues from arbitration (the “carve out” provision), precluded arbitration of the issue of arbitrability. Plaintiff argued that the parties had not agreed “clearly and unmistakably” to have the arbitrator decide arbitrability, and therefore the trial court, rather than the arbitrator, should determine arbitrability. (First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, 944 [131 L.Ed.2d 985, 115 S.Ct. 1920] [“Courts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clea[r] and unmistakable]’ evidence that they did so”].) Defendants asserted that, by incorporating the AAA commercial arbitration rules into the arbitration provision, the parties evidenced their clear and unmistakable agreement that the arbitrator should decide arbitrability. (See Contec Corp. v. Remote Solution, Co., Ltd. (2d Cir. 2005) 398 F.3d 205, 208 [under FAA, “when . . . parties explicitly incorporate [arbitration] rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator”].)

The trial court denied defendants’ motion to compel arbitration of the issue of arbitrability, concluding that defendants had “not sufficiently established the existence of an agreement to arbitrate the issues here in dispute.” The trial court reasoned that plaintiff had “filed suit under the conditions set forth” in the “carve out” provision, section 4.6.5. Because a suit under section 4.6.5 could proceed “without any obstruction from” the arbitration provision in Article 8, the parties had not “clearly and unmistakably agreed to arbitrate the issue of arbitrability with respect to the claims at issue here.”

To reach that decision, the trial court necessarily interpreted, construed and determined the scope of the arbitration provision. Defendants contend that by doing so, the trial court erred, for the parties agreed that the arbitrator was to interpret, construe, and determine the scope of the agreement, including the arbitration clause. Regardless of the ultimate merit of defendants’ position, it is based on a reasonable interpretation of the parties’ agreement. The trial court’s order thus denied defendants’ petition to compel arbitration of an issue that defendants reasonably contended was subject to the parties’ arbitration agreement.

The trial court’s order is appealable. Section 1294, subdivision (a) provides that “[a]n order dismissing or denying a petition to compel arbitration” is appealable.² Section 1294 does not specify that only a final order dismissing or denying a petition to compel arbitration is appealable, nor does it state that only an order dismissing or denying a petition to compel arbitration of all potentially arbitrable claims is appealable. The plain language of section 1294 permits appellate review of “[a]n order dismissing or denying a petition to compel arbitration.” That would include an order denying a petition to compel arbitration of a specific issue, including the issue of arbitrability.

The practical and policy considerations served by the general rule limiting appellate jurisdiction to the review of final judgments are not the same considerations served by section 1294. Both the FAA and the California Arbitration Act (§ 1281 et seq.) promote arbitration as an alternative to litigation. As we recently observed, “[t]he purpose and effect of [these enactments] is to encourage the arbitration of civil disputes outside the judicial forum.” (Konig v. U-Haul Co. of California (2006) 145 Cal.App.4th 1243, 1250 [52 Cal.Rptr.3d 244]; see also Southland Corp. v. Keating (1984) 465 U.S. 1, 10 [79 L.Ed.2d 1, 104 S.Ct. 852]; Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 97 [99 Cal.Rptr.2d 745, 6 P.3d 669].)

This state’s policy supporting arbitration is reflected in the structure of section 1294, which is comparable to section 16 of the FAA (9 U.S.C. § 16). That provision in the FAA³ “generally permits immediate appeal of orders hostile to arbitration, whether the orders are final or interlocutory, but bars appeal of interlocutory orders favorable to arbitration.” (Green Tree Financial Corp.-Ala. v. Randolph (2000) 531 U.S. 79, 86 [148 L.Ed.2d 373, 121 S.Ct. 513].) To further that policy, section 1294 makes appealable orders denying petitions to arbitrate, superseding prior law. For example, Berman v. Renart Sportswear Corp. (1963) 222 Cal.App.2d 385 [35 Cal.Rptr. 218], held that section 1294, subdivision (a) superseded the California Supreme Court’s decision in Sjoberg v. Hastorf (1948) 33 Cal.2d 116 [199 P.2d 668], which had held that an order denying a defendant’s petition to arbitrate in a breach of contract action was a nonappeable, interlocutory order. Section 1294, subdivision (a), the Berman court held, changed the law, and permitted such an appeal. (Berman v. Renart Sportswear Corp., supra, 222 Cal.App.2d at p. 387.)

California courts addressing issues of appealability under section 1294 thus focused on whether the order appealed from is consistent with or hostile to the policy promoting arbitration. For example, in Porter v. United Services Automobile Assn. (2001) 90 Cal.App.4th 837 [108 Cal.Rptr.2d 860], the parties agreed that the dispute was arbitrable; the only issue was whether the arbitration should proceed in California or New Jersey. The trial court denied the plaintiff’s petition to compel arbitration in California and “advised” counsel “to proceed forthwith to arbitration in New Jersey.” (Id. at p. 839.) This division held that “the order did not deny the propriety of arbitration altogether,” but “did specifically deny the petition in so far as it sought to compel arbitration as requested by plaintiff—that is, arbitration in California.” Accordingly, we held that “the order falls within the plain language of section 1294, subdivision (a), as an order ‘denying a petition to compel arbitration.’ ” (Id. at p. 840.)

The court in Henry v. Alcove Investment, Inc. (1991) 233 Cal.App.3d 94, 99-100 [284 Cal.Rptr. 255], held that section 1294, subdivision (a) permitted an appeal from an order staying arbitration under section 1281.2 because such an order was the “functional equivalent of an order refusing to compel arbitration.” In Sanders v. Kinko’s, Inc. (2002) 99 Cal.App.4th 1106, 1109-1110 [121 Cal.Rptr.2d 766], overruled on other grounds by Green Tree Financial Corp.-Ala. v. Randolph, supra, 531 U.S. 79, the court held that section 1294, subdivision (a) permitted an appeal from the trial court’s order denying a petition to arbitrate “without prejudice,” even though the trial court stated its intention to address “the question of which/whose claims are subject to arbitration under the FAA” after it had “take[n] care of class certification issues.”

Although none of these cases is directly on point, they suggest that it is not only an order that constitutes an outright denial by the trial court of a petition to compel arbitration of the dispute that is appealable under section 1294. Rather, the key consideration is whether the order would, if erroneous, adversely affect the parties’ substantial interests in arbitrating their dispute. The order in this case does that.

Although defendants’ motion to compel arbitration was limited to the issue of arbitrability, the trial court’s decision denying the motion appears to foreclose arbitration of any issue in the lawsuit. The trial court denied defendants’ motion on the ground that the plaintiff’s action was filed “under Section 4.6.5,” and that actions under section 4.6.5 could proceed “without any obstruction from any provision articulated in Article 8, including the provision that consigns the arbitrator the authority to resolve disputes concerning the application and interpretation of the agreement.” It seems to me logically the trial court cannot now determine that any issue in plaintiff’s action is arbitrable, because to do so would mean that any such issue is subject to Article 8 and its requirement that the arbitrator determine the issue of arbitrability. In effect, therefore, the trial court has denied defendant’s petition to compel arbitration of plaintiff’s claims.⁴

The trial court’s order denies defendants one benefit of their bargain under the arbitration agreement: the right to have an arbitrator determine arbitrability in the first instance. Even if, on a future appeal, defendants ultimately prevail on the issue of who decides arbitrability, defendants already will have been forced to incur the expense and delay of having to litigate the arbitrability of plaintiff’s claims in a judicial forum. This will almost certainly involve substantial and expensive motion practice. Section 1294, subdivision (a), permits appeals from orders denying arbitration precisely to avoid such potentially unnecessary proceedings. “Contracts to arbitrate are not to be avoided by allowing one party to ignore the contract and resort to the courts. Such a course could lead to prolonged litigation, one of the very risks the parties, by contracting for arbitration, sought to eliminate.” (Southland Corp. v. Keating, supra, 465 U.S. at p. 7; see Henry v. Alcove Investment, Inc., supra, 233 Cal.App.3d at pp. 99-100.)

Apart from the expense and delay, the issue of who decides arbitrability is not insignificant. As the United States Supreme Court explained, “Although the question is a narrow one, it has a certain practical importance. That is because a party who has not agreed to arbitrate will normally have a right to a court’s decision about the merits of its dispute (say, as here, its obligation under a contract). But, where the party has agreed to arbitrate, he or she, in effect, has relinquished much of that right’s practical value. The party still can ask a court to review the arbitrator’s decision, but the court will set that decision aside only in very unusual circumstances. [Citations.] Hence, who— court or arbitrator—has the primary authority to decide whether a party has agreed to arbitrate can make a critical difference to a party resisting arbitration.” (First Options of Chicago, Inc. v. Kaplan, supra, 514 U.S. at p. 942.) The same consideration would apply to the party seeking arbitration.

Finally, there is no authority that makes nonappealable an order denying a petition to arbitrate a specific issue arguably covered by the arbitration clause. Here, the parties clearly and unmistakably agreed that the arbitrator, rather than the court, decides the issue of arbitrability. (First Options of Chicago, Inc. v. Kaplan, supra, 514 U.S. at p. 944.) Determining arbitrability is an arbitrable issue. Defendants petitioned to have that issue arbitrated. The denial of that petition should be as appealable as an order denying a petition to arbitrate any other issue. Accordingly, the parties in this case should have the right to seek appellate review of the determination of who decides arbitrability prior to contesting the arbitrability of their substantive disputes in a judicial forum.

Even if the order before us is not appealable, I would treat this appeal as a writ proceeding and resolve it on the merits. “A purported appeal from a nonappealable order may be considered to be a petition for an extraordinary writ if (1) the briefs and record before us contain in substance all the elements prescribed by rule [8.490, former rule 56] of the California Rules of Court for an original mandate proceeding and (2) there are extraordinary circumstances justifying the exercise of that discretionary power.” (Angell v. Superior Court (1999) 73 Cal.App.4th 691, 698 [86 Cal.Rptr.2d 657].) Both of these requirements are met here. The appeal has been fully briefed and an adequate record provided. Our resolution of this issue would either avoid unnecessary trial court proceedings, or establish confidence that any future proceedings in the trial court will not be annulled by a contrary determination of this threshold issue in a later appeal. The issues of who determines arbitrability and arbitrability are either coextensive or overlap. It makes little sense, and is contrary to considerations of judicial efficiency, to compel defendants to bring separate writ proceedings in order to obtain appellate review of an issue that has been fully presented to this court.

I would not dismiss the appeal.

1 All statutory references are to the Code of Civil Procedure unless specified otherwise.

2 Section 1294 provides: “An aggrieved party may appeal from: [IQ (a) An order dismissing or denying a petition to compel arbitration, [f] (b) An order dismissing a petition to confirm, correct or vacate an award, [f] (c) An order vacating an award unless a rehearing in arbitration is ordered, [f] (d) A judgment entered pursuant to this title, [f] (e) A special order after final judgment.”

3 Title 9 United States Code section 16 provides: “(a) An appeal may be taken from—[f] (1) an order—HI (A) refusing a stay of any action under section 3 of this title, [|] (B) denying a petition under section 4 of this title to order arbitration to proceed, H3 (C) denying an application under section 206 of this title to compel arbitration, [1] (D) confirming or denying confirmation of an award or partial award, or ['][] (E) modifying, correcting, or vacating an award [*}[] (b) Except as otherwise provided in section 1292(b) of title 28, an appeal may not be taken from an interlocutory order—HI ... HI (2) directing arbitration to proceed under section 4 of this title . . . .”

4 Defendants assert that the trial court’s decision leaves room to argue that plaintiff’s substantive claims are arbitrable. Nothwithstanding my analysis, I do not intend to foreclose counsel’s ingenuity in formulating any such argument.